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Category: Direct Taxes

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.”


 

 


 

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

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Unreported :

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

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

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

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

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

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

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

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

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

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

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

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

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

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II. Reported :


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


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

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

 

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

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

 


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

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




 

 


 

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

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II. Reported :


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

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

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

 

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


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

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

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II. Reported :


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

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

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

 

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

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

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

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II. Reported :



 


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

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

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

 

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

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

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

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

 


 

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

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II. Reported :


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


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

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

 

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

 


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

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

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

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

New Page 1

II. Reported :


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

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

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

 

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

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

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

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

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

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

 


 

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

New Page 1

II. Reported :


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

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

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

 

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

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

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

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

 


 

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

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


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

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

 

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

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

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

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

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

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

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


 

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

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

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

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

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

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

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

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

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

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

New Page 1

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

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

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

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

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

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

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

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

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  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

New Page 2

  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.

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  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.

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  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.

New Page 1

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.

New Page 1

  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.

New Page 1

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.

New Page 1

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.

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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.



 


[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.

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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

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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.

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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.

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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.

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 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

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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

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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 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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Depreciation : S. 32 of I. T. Act, 1961 : A. Y. 1992-93 : Condition precedent : User of machinery : Machinery installed but found defective : Amounts to user of machi-nery : Assessee entitled to depreciation.

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  1. Depreciation : S. 32 of I. T. Act, 1961 : A. Y. 1992-93
    : Condition precedent : User of machinery : Machinery installed but found
    defective : Amounts to user of machi-nery : Assessee entitled to depreciation.



 


[CIT vs. Chamundeshwari Sugar Ltd; 309 ITR 326
(Karn)].

The assessee company was running a sugar factory. For the
A. Y. 1992-93, the assessee company installed pollution control machinery as
per the mandate of the Pollution Control Board. The assessee claimed
depreciation to the extent of the value of the machinery installed. The
Assessing Officer found that the machinery that was installed was found to be
defective during the trial runs, and therefore, held that the machinery was
not used for the purpose of business as required u/s. 32 of the Income-tax
Act, 1961. Accordingly, the Assessing Officer disallowed the claim for
depreciation. The Tribunal allowed the claim of the assessee and held that the
assessee was entitled to depreciation because the machinery was installed and
merely because it did not effectively function that was not a ground to reject
depreciation.

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

“i) The interpretation of ‘used for the purpose of
business’ by the Supreme Court in Liquidator of Pursa Ltd. vs. CIT
(1954) 25 ITR 265 lays down that machinery should be installed. The purport
and object of law relating to depreciation as envisaged u/s. 32 of the
Income-tax Act, 1961, has to be meaningfully interpreted, consistent with
the object. When the assessee bona fide installs any machinery but it
becomes defective and non-functional, it cannot be said that it is not put
to use for the purpose of business.

ii) The assessee was entitled to depreciation on the
pollution control machinery.”

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The liability Special Court (Trial of offences relating to Transaction in Securities) Act, 1992. Has precedence over other liability u/s.11(2)(a) — Scope of powers under the Act

The liability Special Court (Trial of offences relating to Transaction in Securities) Act, 1992. Has precedence over other liability u/s.11(2)(a) — Scope of powers under the Act.

    [DCIT v. State Bank of India & Ors., (2009) 308 ITR 1 (SC)]

    The present appeals were filed against the judgment and order of the Special Court constituted under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (hereinafter referred to as ‘the Act’) for conducting trial of offences related to transactions in securities. By the impugned judgment and order, the Special Court allowed the application filed by Respondent No. 1, the State Bank of India and directed the appellant to deposit an amount of Rs. 546.22 crores with the Custodian along with interest at 9% per annum. The Special Court while issuing the said direction held that the income-tax liability for the statutory period of the notified party, namely, Mr. Harshad S. Mehta u/s. 11(2)(a) did not at that stage appear to be in excess of Rs.140 crores approximately, subject to further orders that the Court might pass at a later stage. In the impugned judgment and order a further direction was issued that no useful purpose would be served by keeping the amount lying deposited with the Custodian and, therefore, a direction was also issued to the Custodian to pay to the banks, namely, the State Bank of India and the Standard Chartered Bank against their decrees the principal amount, from the amount in deposit with the Custodian as also from the amount that was likely to be coming back from the Income-tax Department. As the said amount was inadequate to fully satisfy the claims of the banks with respect to the principal amount, it was further held that the same would be disbursed by the Custodian on pro rata basis and after receiving an undertaking from the banks to the Court that they would bring back the amount, if so required, on such terms and conditions as may be directed by the Court.

    The issue sought to be raised by the appellant, Income-tax Department by filing the present appeal was whether the Special Court constituted under the aforesaid Act was right in scaling down the priority tax demand by delving into the merits of the assessment orders and by deciding the matter as an appellate authority, which directions according to the appellant were in violation of the decision of the Supreme Court in the case of Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC 1.

    The Supreme Court noted that the subject-matter of the appeal related to the security scam of Harshad S. Mehta and the period relevant to the said scam related to the A.Ys. 1992-93 and 1993-94. The Assessing Officer completed the assessment proceedings for both the aforesaid years in respect of Harshad S. Mehta after gathering information from many sources and after giving an opportunity to the assessee to furnish details/explanations on the same. The Income-tax Officer passed an assessment order assessing the income for the A.Y. 1992-93 at Rs.2,014 crores and for the A.Y. 1993-94 at Rs. 1,396 crores. The assessment orders were challenged before the Commissioner of Income-tax (Appeals) by the assessee and were largely confirmed. Cross-appeals have been filed by the Revenue as also by the assessee for the A.Y. 1992-93, which are pending with the Income-tax Appellate Tribunal, whereas for the A.Y. 1993-94 appeal filed by the assessee is pending for admission. The orders of assessment were largely confirmed by the Commissioner of Income-tax (Appeals) resulting in raising a tax demand of Rs.1,743 crores by the Income-tax Department.

    The Supreme Court observed that in terms of the provisions of S. 11(2)(a) of the Act, the Income-tax Department has first right on appropriation of the assets of Harshad S. Mehta lying in the custody of the Custodian against its tax demand for the A.Y. 1992-93 and the A.Y. 1993-94 as tax component. Therefore, the Income-tax Department is required to be paid in priority over the liabilities payable to the banks, financial institutions and other creditors, particularly for the aforesaid relevant two years which were considered as statutory period.

    In terms of the aforesaid provisions and at the request of the Income-tax Department, the Custodian had earlier released a sum of Rs.686.22 crores to the Department pursuant to various orders passed by the Special Court, which were confirmed by the Supreme Court. The said interim release of funds of Rs.686.22 crores to the Department was subject to filing of an affidavit/undertaking by the Secretary (Revenue), Government of India that the amount would be brought back to the Court/custodian along with interest within a period of four weeks, if so directed by the Special Court.

    In Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC 1 it was held by the Supreme Court that such priority would be restricted to the tax component of the demand for priority period relevant to the A.Y. 1992-93 and the A.Y. 1993-94. The Supreme Court also held that the Special Court cannot sit in appeal over the order of tax assessment but in case of any fraud, collusion or miscarriage of justice in the assessment proceedings where tax assessed is disproportionately high in relation to funds available, the Special Court could scale down the tax liability to be paid in priority.

Applications were filed by the State Bank of India (hereafter referred to as ‘the SBI’) and also by other banks including Standard Chartered Bank (herein-after referred to as ‘the SCB’) before the Special Court seeking direction to scale down the priority demand on the ground that there was gross miscarriage of justice in making an order of assessment in the case of the notified party, namely, Harshad S. Mehta. In the said applications reference was also made to the decrees on admission passed in favour of the banks against Harshad S. Mehta which according to the banks had become final and binding. Relying on the said decrees it was contended on behalf of the banks that passing of decrees prove tha t the concerned money which is assessed as income in the hands of Harshad S. Mehta as his income was, in fact, money belonging to the banks and, therefore, there was a miscarriage of justice as the Income-tax Department had considered the said amount/sum to be the income of Harshad S. Mehta. It was also submitted that miscarriage of justice also crept in, in respect of, additions on account of over-sold securities, unexplained stock and unexplained deposits in banks, etc. The aforesaid applications were heard by the Special Court wherein the Income-tax Department refuted the aforesaid submissions that there has been any miscarriage of justice in making the order of assessment in the case of Harshad S. Mehta. However, the Special Court under the impugned order dated September 29, 2007, accepted the pleas raised by the SBI and other banks in part with a direction to scale down the priority demand in the case of Harshad S. Mehta in the following terms and on the following grounds:

Consequently, it was held that if the above amounts were excluded from the total assessed income of the statutory period, the total income would be reduced to approximately Rs.277 crores, and therefore, it was held by the Special Court that the tax liability of Harshad S. Mehta for the aforesaid two assessment years payable u/s.ll(2)(a) of the Act in no case would exceed Rs.149 crores. In terms of the aforesaid findings and conclusions arrived at by the Special Court, directions were issued directing the Income-tax Department to deposit with the Custodian an amount of Rs.546.22 crores with interest at 9% per annum from the date of receipt of the amounts amounting Rs.686.22 crores, with a further direction that the said amount which is to be deposited by the Income-tax Department along with other amount lying deposited with the Custodian would be released in favour of the banks in terms of observations made in the impugned order.

After considering the legislative provisions of the Act and the judicial interpretation in the decision of Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC I, the Supreme Court held that the following general principles regarding the powers of Special Court while discharging the tax liability emerge:

i) The Special Court has no jurisdiction to sit in appeal over the assessment of tax liability of a notified person by the authority or Tribunal or Court authorised to perform that function by the statute under which the tax is levied. A claim in respect of tax assessed cannot be re-opened by the Special Court and the extent of liability, therefore, cannot be examined by the Special Court.

ii) The claims relating to the tax liabilities of a notified person are, along with revenues, cesses and rates entitled for the statutory period, to be paid first in the order of priority and in full, as far as may be, depending upon various circumstances.

iii) The ‘taxes due’ refer to ‘tax as finally assessed’. The tax liability can properly be construed as tax liability of the notified person arising out of transaction in securities during the ‘statutory period’ of April I, 1991 to June 6, 1992.

iv) The priority, however, which is given u!s. 11(2)(a) to such tax liability only covers such liability for the period April I, 1991 to June 6, 1992. Every kind of tax liability of the notified person for any other period is not covered by S. 11(2)(a), although the liability may continue to be the liability of the notified person. Such tax liability may be discharged either under the directions of the Special Courtu /s.11(2)(c), or the taxing authority may recover the same from any subsequently acquired property of a notified person or in any other manner from the ‘notified ‘person in accordance with law.

v) The Special Court can decide how much of the tax liability will be discharged out of the funds in the hands of the Custodian and the Special Court can, for the purpose of disbursing the tax liability, examine whether there is any fraud, collusion or miscarriage of justice in assessment proceedings.

vi) Where the assessment is based on proper material and pertains to the ‘statutory period’, the Special Court may not reduce the tax claimed and pay it out in full, but if the assessment is a ‘best judgment’ assessment, the Special Court may examine whether the taxes so assessed are grossly disproportionate to the properties of the assessee in the hands of the Custodian, applying the Wednesbury Principle of Proportionality and other issues of the said nature. The Special Court may in these cases, scale down the tax liability to be paid out of the funds in the hands of Custodian. Such scaling down, however, should be done only in serious cases of miscarriage of justice, fraud or collusion, or where tax assessed is so disproportionately high in relation to the funds in the hands of the Custodian as to require scaling down in the interest of the claims of the banks and financial institutions and to further the purpose of the Act. The Special Court must have strong reasons for doing so.

In the light of the above, the Supreme Court observed that the fact that decrees have been obtained by the banks in respect of certain dues of Harshad S. Mehta could not be disputed by the Income-tax Department. It also could be disputed by the Income-tax Department that the amounts for which decrees have been obtained by the banks have become final and binding. But then, it was submitted that the taxes due have been ascertained and arrived at in terms of the provisions of the Act and that the banks have failed to establish by producing the relevant documents on record that the said amount, which is decreed in favour of the bank, has been wrongly included in the income of the notified party for the statutory period.

As the priority in payment of tax liability u/s.11(2)(a) is only for the statutory period and not any other period, the Supreme Court found that the appellant was justified while contending that if the banks had a right, title or interest in the attached property on the date of the Notification u!s.3 of the Act for which decrees had been obtained and if the banks were claiming that the said amount had wrongly been included in the income of the notified party for the statutory period, then the banks were required to show the nexus between the said decreed amount and the amount which was included in the income of the notified party for the statutory period.

Secondly with respect to the issue of duplication of a sum of Rs. 601.22 crores it was contended by the appellant that the same was correlated to the first issue and a finding on the said issue could be given only once the finding with respect to the first issue is arrived at. According to the Supreme Court there was no finding either on the issue of nexus or on the issue of duplication by the Special Court in the impugned judgment. Probably the reason for the same was that the said issues were not raised before the Special Court and even if they were raised before the Special Court the same were not addressed or considered in the manner in which they should have been done.

The Supreme Court was of the view that for the adjudication of the disputes which were raised in the present appeal, a finding on the said issues and questions would be mandatory and the same could not be dispensed with under any circumstances.

The Supreme Court observed that in the absence of relevant documents, neither it would be possible nor would it be appropriate for it to give a finding on the said issues and questions. Therefore in the opinion of the Supreme Court all such disputed questions were required to be decided by the Special Court after giving an opportunity to the parties to place all the relevant documents before it so as to enable it to come to a proper and considered finding.

However, while remanding the matter for a finding on the said issues and questions, the Supreme Court held that if the nexus is shown by the banks between the amounts for which decrees have been obtained, which have become final and binding and the amount which is included in the income in the hands of Harshad S. Mehta by the Department, the same will have to be disbursed to the banks by the Special Court. It also held that on account of over-sold securities if the delivery was given by Harshad S. Mehta and the transaction was complete, only the difference between the payable and receivable would be taken and not the gross amount. How-ever, the issue as to whether the decrees were on account of oversold securities and, if so, was there any duplication or whether the decrees were on account of siphoning of the funds, was required to be adjudicated by the Special Court on appreciation of the relevant documents.

The Supreme Court, however, clarified that so far as the amounts of Rs.253 crores and Rs. 101 crores are concerned, the appellants had not stated that the said amounts were not included in the income of the notified party for the statutory period. The consent decrees obtained in respect of Rs.2S3 crores were not challenged by the appellant, which led the Special Court to believe that the appellant had accepted the settlement and accordingly scaled down the said amount from the income of Harshad S. Mehta. Similar was the case with the amount of Rs.101 crores. Thus, the scaling down of the said amount was upheld and would not be disturbed.

Capital gains : Exemption u/s. 54 of I. T. Act, 1961 : A. Y. 1996-97 : Purchase of two flats and combined to make one residential unit : Exemption u/s. 54 available

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Capital gains : Exemption u/s. 54 of I. T. Act, 1961 :
A. Y. 1996-97 : Purchase of two flats and combined to make one residential
unit : Exemption u/s. 54 available



 


[CIT vs. D. Ananda Basappa; 309 ITR 329 (Karn).]

In October 1995 the assessee sold a residential house for
Rs.2,12,50,000 resulting in long-term capital gain. The assessee purchased two
residential flats adjacent to each other executing two separate registered
sale deeds in respect of two flats situated side by side, on the same day. The
two flats were modified to make it one residential apartment. The assessee
claimed exemption u/s. 54 in respect of investment in the two flats. It was
found by the inspector that the two flats were in the occupation of two
different tenants. The Assessing Officer held that Section 54(1) does not
permit exemption for the purchase of more than one residential premises and
therefore allowed exemption to the extent of purchase of one residential flat.
The Tribunal allowed the assessee’s claim in full.

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

“i) A plain reading of the provisions of section 54(1) of
the Income-tax Act, 1961, discloses that when an individual or Hindu
undivided family sells a residential building or land appurtenant, he can
invest the capital gains for purchase of a residential building to seek
exemption of the capital gains tax. Section 13 of the General Clauses Act,
1897, declares that whenever a singular is used for a word, it is
permissible to include the plural. The expression ‘a’ residential house
should be understood in a sense that the building should be residential in
nature and ‘a’ should not be understood to indicate a singular number.

ii) It was shown by the assessee that the apartments were
situated side by side. The builder had also stated that he had effected
modifications of the flats to make them one unit by opening the door in
between the two apartments. The fact that at the time when the Inspector
inspected the premises, the flats were occupied by two different tenants was
not a ground to hold that the apartment was not one residential unit. The
fact that the assessee could have purchased both the flats in one single
sale deed or could have narrated the purchase of two premises as one unit in
the sale deed was not a ground to hold that the assessee had no intention to
purchase two flats as one unit. The assessee was entitled to the exemption
u/s. 54.”

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Search and seizure — Whether the High Court was justified in holding that the Additional Director (Investigation) do not have jurisdiction to authorise Joint Director to effect search ? — Matter left open since it had become academic.

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3 Search and
seizure — Whether the High Court was justified in holding that the Additional
Director (Investigation) do not have jurisdiction to authorise Joint Director to
effect search ? — Matter left open since it had become academic.


[DCIT v. Dr. Nalin Mahajan,
(2009) 314 ITR 340 (SC)]


The Delhi High Court (257 ITR
123) had inter alia held that the Additional Director (Investigation) did not
have the power to issue any authorisation or warrant to the Joint Director as he did not have any statutory authority to
issue such authorisation or warrant. Consequently, the High Court declared the
Notification dated 6th September, 1989 as not valid to that extent.

The aforesaid decision of the
High Court was challenged before the Supreme Court.

The Supreme Court found that the
above question had become academic because after the impugned judgment, the
Commissioner of Income-tax, Delhi, had issued order u/s.132B of the Act for
release of cash, for release of jewellery and for release of the books of
account that were seized during the search and seizure operations conducted
u/s.132(1), which indicated that the matter had become final so far as the
assessment and recovery of tax was concerned. The Supreme Court therefore did
not examine the issues raised in the civil appeal and dismissed the civil appeal
keeping the questions of law raised therein expressly open.


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Assessment — Intimation u/s.143(1)(a) — Effect of amendment of S. 143(1A) by Finance Act, 1993 — Whether retrospective in case of reduction of loss ? — Matter remanded to the High Court.

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1 Assessment —
Intimation u/s.143(1)(a) — Effect of amendment of S. 143(1A) by Finance Act,
1993 — Whether retrospective in case of reduction of loss ? — Matter remanded to
the High Court.


[CIT v. Ashok Paper Mills,
(2009) 315 ITR 426 (SC)]

In an appeal against the
decision of the learned Single Judge passed in the writ petitions, the Division
Bench of the Gauhati High Court (250 ITR 673) found that there was no challenge
to the decision of the learned Single Judge about the constitutional validity of
the provisions of Ss.(1A) of S. 143 of the Act and therefore it was only
required to deal with the second limb of the order related to the
retrospectivity of the provisions of the aforesaid sub-section substituted by
the Finance Act, 1993.

The Division Bench of the High
Court, referring to the decisions of the Supreme Court in CIT v. Hindustan
Electro Graphites Ltd., (2000) 243 ITR 48 and in ACIT v. J. K. Synthetics
Ltd., (2001) 251 ITR 200, held that the Act or omission for which no
income-tax was payable as per law in force at a given time, could not be
subjected to additional tax with retrospective
effect and thus dismissed the appeal.

In an SLP filed in a connected
tax reference which was decided following the above decision of the Gauhati High
Court, the Supreme Court remanded the matter to the High Court for considering
it afresh in the light of its judgment in
ACIT v. J. K. Synthetics Ltd. (supra).


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Penalty — Concealment of income — Penalty could be imposed u/s.271(1)(c) of the Act even if the returned income as well as the assessed income is a loss.

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2 Penalty —
Concealment of income — Penalty could be imposed u/s.271(1)(c) of the Act even
if the returned income as well as the assessed income is a loss.


[CIT v. Moser Baer India Ltd.,
(2009) 315 ITR 460 (SC)]

The assessee had filed a return
of income declaring a loss of Rs.2,72,12,620. In the course of the assessment
proceedings it was found that although the assessee had excluded the income of
floppy units II and III from its total income by claiming exemption u/s.10A and
u/s.10B of the Act, the depreciation in respect of these units had been deducted
from its income. The assessee had explained that the claim for depreciation was
a clerical mistake. The assessee filed a further application withdrawing its
claim of deduction u/s.10B of the Act in respect of floppy unit II for the
assessment year in question, since that unit had incurred a loss.

The Assessing Officer computed
the total income at Rs. Nil after adjusting the brought forward
losses/depreciation of Rs.47,01,433.11. The Assessing Officer disallowed the
depreciation in respect of floppy unit II and III of Rs.4,81,83,139. The
Assessing Officer also initiated penalty proceedings u/s.271(1)(c) of the Act.
An order imposing penalty of Rs.4,43,28,488 u/s.271(1)(c) of the Act came to be
passed.

The Commissioner of Income-tax
(Appeals) allowed the appeal holding that since the tax payable on the total
income as assessed was nil, there was no positive income, and therefore, the
penalty could be levied.

On an appeal to the Tribunal by
the Revenue, the assessee filed a cross-objection to support the order of the
Commissioner of Income-tax (Appeals) additionally on the ground that the
Assessing Officer had not recorded his satisfaction in the assessment order that
the penalty proceedings ought to be initiated against the assessee.

The Tribunal inter alia,
relied on the decision of the Delhi High Court in CIT v. Ram Commercial
Enterprises Ltd., (2000) 246 ITR 568 and concluded that the Assessing Offer
had not recorded a specific satisfaction before initiating the penalty
proceedings against the assessee and accordingly, the entire penalty proceedings
were set aside.

The High Court dismissed the
appeal of the Revenue following the decision of the Supreme Court in Virtual
Soft Systems Ltd. (2007) 289 ITR 83 (SC) in which it was held that no penalty
could be levied u/s.271(1)(c) of the Act, prior to amendment made to S. 271 by
the Finance Act, 2002, where there is no positive assessed income on which any
tax is payable.

The Supreme Court reversed the
judgment of the High Court in view of the decision of its Larger Bench in CIT
v. Gold Coin Health Food Pvt. Ltd., (2008) 304 ITR 308 and remitted the
matter to the Tribunal for considering the question regarding concealment.

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Bad debt — Write-off — After 1st April, 1989, if an assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like Sundry Debtors’ Account, it could constitute a write-off of an actual debt and it is not neces

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28 Bad debt — Write-off —
After 1st April, 1989, if an assessee debits an amount of doubtful debt to the
profit and loss account and credits the asset account like Sundry Debtors’
Account, it could constitute a write-off of an actual debt and it is not
necessary to square off each individual account.


[Vijaya Bank v. CIT & Anr.,
(2010) 323 ITR 166 (SC)]

For the A.Y. 1994-95, the
Assessing Officer disallowed a sum of Rs.7,10,47,161 which the assessee-bank had
reduced from loans and advances or debtors on the ground that the impugned bad
debt had not been written off in an appropriate manner as required under the
accounting principles. According to him, the impugned bad debt supposedly
written off by the assessee-bank was mere provision and the same could not be
equated with the actual write-off of the bad debt, as per the requirement of S.
36(1)(vii) of the Income-tax Act, 1961 (‘the 1961 Act’ for short) read with
explanation thereto which Explanation stood inserted in the 1961 Act by the
Finance Act, 2001, with effect from April 1, 1989. The assessee carried the
matter in appeal before the Commissioner of Income-tax (Appeals) [‘CIT(A)’, for
short], who opined that it was not necessary for the purpose of writing off of
bad debts to pass corresponding entries in the individual account of each and
every debtor and that it would be sufficient if the debit entries are made in
the profit and loss account and corresponding credit is made in the ‘bad debt
reserve account’. Against the decision of the Commissioner of Income-tax
(Appeals) on this point, the Department preferred an appeal to the Income-tax
Appellate Tribunal (‘Tribunal’, for short). Before the Tribunal, it was argued
on behalf of the Department that write-off of each and every individual account
under the head ‘Loans and advances’ or ‘debtors’ was a condition precedent for
claiming deduction u/s.36(1)(vii) of the 1961 Act. According to the Department,
the claim of actual write-off of bad debts in relation to banks stood on a
footing different from the accounts of the non-banking assessee(s), though it
was not disputed that S. 36(1)(vii) of the 1961 Act covered banking as well as
non-banking assessees. According to the assessee, once a provision stood created
and, ultimately carried to the balance sheet wherein loans and advances or
debtors depicted stood reduced by the amount of such provision, then there was
actual write-off, because, in the final analysis, at the year end, the so-called
provision did not remain and balance sheet at the year ended only carried the
amount of loans and advances or debtors, net of such provision made by the
assessee for the impugned bad debt. The Tribunal, upheld the above contention of
the assessee on three grounds. Firstly, according to the Tribunal, the assessee
had rightly made a provision for bad and doubtful debt by debiting the amount of
bad debt to the profit and loss account so as to reduce the profit of the year.
Secondly, the provision account so created was debited and simultaneously the
amount of loans and advances or debtors stood reduced and, consequently, the
provision account stood obliterated. Lastly, according to the Tribunal, loans
and advances or the sundry debtors of the assessee as at the end of the year
lying in the balance sheet was shown as net of ‘provision for doubtful debt’
created by way of debit to the profit and loss account of the year.
Consequently, the Tribunal, on this point, came to the conclusion that deduction
u/s.36(1)(vii) of the 1961 Act was allowable.

On the question whether it
was imperative for the assessee to close each and every individual account and
its debtors in its books or a mere reduction in the loans and advances to the
extent of the provision for bad and doubtful debt was sufficient, the answer
given by the Tribunal was that, in view of the decision of the Gujarat High
Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT, reported in
(1981) 130 ITR 95, the Commissioner of Income-tax (Appeals) was right in coming
to the conclusion that since the assessee had written off the impugned bad in
its books by way of a debit to the profit and loss account simultaneously
reducing the corresponding amount from loans and advances or debtors depicted on
the assets side in the balance sheet at the close of the year, the assessee was
entitled to deduction u/s.36(1)(vii) of the 1961 Act. This view was not accepted
by the High Court which came to the conclusion by placing reliance upon a
judgment in the case of CIT v. Wipro Infotech Limited that in view of the
insertion of the Explanation, vide the Finance Act, 2001, with effect from April
1, 1989, the decision of the Gujarat High Court in the case of Vithaldas H.
Dhanjibhai Bardanwala (supra) no more held the field and, consequently, mere
creation of a provision did not amount to actual write-off of bad debts.

In the civil appeals filed
against the order of the High Court, the Supreme Court observed that broadly,
two questions arose for its determination. The first question that arose for
determination concerned the manner in which actual write-off takes place under
the accounting principles. The second question that arose for determination was,
whether it was imperative for the assessee-bank to close the individual account
of each debtor in its books or a mere reduction in the ‘loans and advances
account’ or debtors to the extent of the provision for bad and doubtful debt was
sufficient.

According to the Supreme
Court, the first question was considered by it in Southern Technologies Ltd. v.
Joint CIT, (2010) 320 ITR 577, in which it had an occasion to deal with the
first question and in that case it had been held that after 1st April, 1989, if
an assessee debits an amount of doubtful debt to the profit and loss account and
credits the asset account like sundry debtors’ account, it would constitute a
write-off of an actual debt. However, if an assessee debits ‘provision for
doubtful debt’ to the profit and loss account and makes a corresponding credit
to the ‘current liabilities and provisions’ on the liabilities side of the
balance sheet, then it would constitute a provision for doubtful debt. In the
latter case, the assessee would not be entitled to deduction.

In regards to view expressed by the Gujarat High Court in Vithaldas H. Dhanjibhai Bardanwala (supra) and sequent insertion of Explanation in S. 36(1)(vii) w.e.f. April 1, 1989 the Supreme Court clarified that in the aforesaid judgment of the Gujarat High Court, a mere debit to the profit and loss account was sufficient to constitute actual write-off, whereas after the Explanation, the assessee is now required not only to debit the profit and loss account, but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that at the end of the year, the amounts of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. According to the Supreme Court, the High Court had lost sight of this aspect in its impugned judgment. The Supreme Court, on the first question, therefore, held that the assessee was entitled to the benefit of deduction u/s.36(1)(vii) of the 1961 Act as there was actual write-off by the assessee in its books.

Coming to the second question, the Supreme Court noted that what is being insisted upon by the Assessing Officer is that mere reduction of the amount of loans and advances or the debtors at the end would not suffice and, in the interest of transparency, it would be desirable for the assessee-bank to close each and every individual account of loans and advances or debtors as a pre-condition for claiming deduction u/s.36(1)(vii) of the 1961 Act. This view has been taken by the Assessing Officer because the Assessing Officer apprehended that the assessee-bank might be taking the benefit of deduction u/s.36(1)(vii) of the 1961 Act, twice over. The Supreme Court held that it cannot decide the matter on the basis of apprehensions/desirability. It is always open to the Assessing Officer to call for the details of individual debtor’s account if the Assessing Officer has reasonable grounds to believe that the assessee has claimed deduction, twice over. The Supreme Court observed that the assessee had instituted recovery suits in courts against its debtors. If individual accounts were to be closed, then the debtor/defendant in each of those suits would rely upon the bank statement and contend that no amount is due and payable in which event the suit would be dismissed.

The Supreme Court further observed that according to the Department, it was necessary to square off each individual account, failing which there was likelihood of escapement of income from assessment. According to the Department, in cases where a borrower’s account is written off by debiting the profit and loss account and by crediting loans and advances or debtors accounts on the assets side of the balance sheet, then as and when in the subsequent years if the borrower repays the loan, the assessee will credit the repaid amount to the loans and advances account not to the profit and loss account, which would result in escapement of income from assessment. On the other hand, if bad debt is written off by closing the borrower’s account individually, then the repaid amount in subsequent years will be credited to the profit and loss account on which the assessee-bank has to pay tax. The Supreme Court held that although, prima facie, this argument of the Department appeared to be valid, on a deeper consideration, it is not so for three reasons. Firstly, the head office accounts clearly indicated, in the present case, that on repayment in subsequent years, the amounts were duly offered for tax. Secondly, one had to keep in mind that under the accounting practice, the accounts of the rural branches have to tally with the accounts of the head office. If the repaid amount in subsequent years is not credited to the profit and loss account of the head office, which is ultimately what matters, then there would be a mismatch between the rural branch accounts and the head office accounts. Lastly, in any event, S. 41(4) of the 1961 Act, inter alia, lays down that where a deduction has been allowed in respect of a bad debt or a part thereof u/s.36(1)(vii) of the 1961 Act, then if the amount subsequently recovered on any such debt is greater than the difference between the debt and the amount so allowed, the excess shall be deemed to the profit and gains of business and, accordingly, chargeable to income-tax as the income of the previous year in which it is recovered. In the circumstances, the Supreme Court was of the view that the Assessing Officer was sufficiently empowered to tax such subsequent repayments u/s.41(4) of the 1961 Act and, consequently, there was no merit in the contention that if the assessee succeeded, then it would result in escapement of income from assessment.

The Supreme Court, therefore, upheld the judgment of the Tribunal and set aside the impugned judgment of the High Court.

Bad debt — After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable.

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27 Bad debt — After April 1,
1989, it is not necessary for the assessee to establish that the debt, in fact,
has become irrecoverable.


[T.R.F. Ltd. v. CIT,
(2010) 323 ITR 397 (SC)]

The Supreme Court was
concerned with the appeals for the A.Y. 1990-91 and the A.Y. 1993-94. The
Supreme Court observed that prior to April 1, 1989, every assessee had to
establish, as a matter of fact, that the debt advanced by the assessee had, in
fact, become irrecoverable. That position got altered by deletion of the word
‘established’, which earlier existed in S. 36(1)(vii) of the Income-tax Act,
1961 (‘the Act’, for short).

The Supreme Court held that
this position in law was well settled. After April 1, 1989, it is not necessary
for the assessee to establish that the debt, in fact, has become irrecoverable.
It is enough if the bad debt is written off as irrecoverable in the accounts of
the assessee. The Supreme Court further held that however, in the present case,
the Assessing Officer had not examined whether the debt had, in fact, been
written off in the accounts of the assessee. When a bad debt occurs, the bad
debt account is debited and the customer’s account is credited, thus, closing
the account of the customer. In the case of companies, the provision is deducted
from sundry debtors. This exercise having not been undertaken by the Assessing
Officer, the Supreme Court remitted the matter to the Assessing Officer for de
novo consideration of the above-mentioned aspect only and that too only to the
extent of the write-off.

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Block assessment — Appeal to the Tribunal (prior to 1-10-1998) against the assessment order could be filed even in the absence of payment of admitted tax.

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6 Block assessment — Appeal
to the Tribunal (prior to 1-10-1998) against the assessment order could be filed
even in the absence of payment of admitted tax.


[CIT v. Pawan Kumar
Laddha, (2010) 324 ITR 324 (SC)]

At the hearing of the appeal
filed by the assessee before the Income-tax Appellate Tribunal against the order
u/s.158C of the Act, the Revenue raised a preliminary objection as to the
maintainability of the appeal on the ground that the assessee having not paid
the admitted tax before filing the appeal, the appeal preferred by him should be
dismissed as not maintainable. In this connection, reliance was placed by the
Department in support of its preliminary objection on S. 249(4)(a) of the 1961
Act.

After going through to
provisions of S. 249(4)(a) and S. 253(1)(b) of the 1961 Act, which at the
relevant time, dealt with an order passed by the Assessing Officer u/s.158C(c)
of the 1961 Act, the Appellate Tribunal held that one cannot read S. 249(4)(a)
into the provisions of S. 253(1)(b) of the 1961 Act, that while S. 253(1) was an
enabling provision giving right of appeal to the assessee to file an appeal to
the Appellate Tribunal, there was no provision similar to S. 249(4)(a), which
fell in Chapter XX-A in S. 253(1)(b), hence, it was not a condition mandatory to
the filing of the appeal to the Appellate Tribunal to pay undisputed tax amount
as condition precedent. Consequently, according to the Appellate Tribunal, there
was no merit in the contention of the Department that an assessee must pay the
admitted tax due before or at the time of filing of the appeal before the
Appellate Tribunal.

Aggrieved by the decision of
the Appellate Tribunal on the preliminary objection raised by the Department,
the matter was carried in appeal u/s.260A of the 1961 Act by the Department to
the High Court of Madhya Pradesh, Indore Bench, which affirmed the view of the
Appellate Tribunal. Hence, the civil appeals were filed before the Supreme
Court.

The Supreme Court held that
Chapter XX deals with ‘Appeals and revisions’. Chapter XX is divided into
headings ‘A’ to ‘F’ S. 246 enumerates a list of orders of the Assessing Officer
against which appeals would lie. In that list of orders, an appeal to the
Appellate Tribunal u/s.253(1) is not mentioned. This was a very important
indicia to show that each heading in Chapter XX deals with a different subject
matter and one could not read the words in Chapter XX-A into the words used in
Chapter XX-B. Chapter XX-A deals with appeals to the Deputy Commissioner and the
Commissioner of Income-tax (Appeals), whereas Chapter XX-B deals with appeals to
the Appellate Tribunal. Similarly, reference to the High Court lies under
Chapter XX-C. It was for this reason that the Supreme Court came to the
conclusion that each heading was a stand-alone item and, therefore, one could
not read the provisions of S. 249(4)(a) into S. 253(1)(b) of the 1961 Act.
According to the Supreme Court, if the argument of the Department was to be
accepted, then, in that event, no appeal or reference could lie even to the High
Court without complying with the provisions of S. 249(4)(a) of the 1961 Act.
This could not be the scheme of the Chapter XX of the 1961 Act. There was one
more reason why the Supreme Court was of the view that 249(4)(a) could not be
read into S. 253(1)(b) of the 1961 Act. S. 253(1)(b) refers to an assessee
filing an appeal to the Appellate Tribunal against an order passed by an
Assessing Officer u/s.158BC(c) of the 1961 Act, Clause (b) came to be inserted
into S. 253(1) by the Finance Act, 1995, and, that too, with effect from 1st
July, 1995. The very concept of block assessment came to be inserted in the
Income-tax Act, 1961, with effect from 1st July, 1995, whereas the words ‘this
Chapter’ in S. 249(4) came to be inserted in the Income-tax Act, 1961, vide the
Taxation Laws (Amendment) Act, 1975, with effect from 1st October, 1975. This
was one more reason to confine the expression ‘this Chapter’ in S. 249(4) to
Chapter XX-A without it being extended to S. 253(1)(b) which is there in Chapter
XX-B. Further, under the scheme of Chapter XX as stated above, no appeal
u/s.249(4)(a) in Chapter XX-A was admissible without the assessee having paid
the admitted tax due on the income returned by him. It appeared that once S.
249(4)(a) is treated as a mandatory condition for filing an appeal before the
Commissioner of Income-tax (Appeals) and once that condition stood satisfied at
the time of his filing an appeal to the Commissioner of Income-tax (Appeals),
then there was no necessity for the assessee to once again pay the admitted tax
due as a condition precedent to his filing the appeal before the Appellate
Tribunal u/s.253(1)(b) of the 1961 Act. The Supreme Court held that lastly, one
must keep in mind the principle that the doctrine of incorporation cannot be
invoked by implication. A provision which insists on the assessee satisfying a
condition of paying the admitted tax as condition precedent to his filing of
appeal u/s.253(1)(b) of the 1961 Act is a restrictive provision. Such a
restrictive provision must be clearly spelt out by the Legislature while
enacting the statute. The Courts have to be careful in reading into the Act such
restrictive provisions as that would tantamount to judicial legislation which
the Courts must eschew. It is for the Parliament to specifically say that no
appeal shall be filed or admitted or maintainable without the assessee(s) paying
the admitted tax due. That has been done only in the case of an appeal u/s.
249(4)(a) of the 1961 Act. The Supreme Court held that it could not read such a
restrictive provision into S. 253(1)(b) of the 1961 Act. If it did so, it was
judicially legislating by reading something into the Act which was not there.

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Co-operative society — Whether the society could be said to be engaged in a cottage industry or whether it could be said to be engaged in a collective disposal of labour of its members — Though Court did not interfere in the matter in absence of material,

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26 Co-operative society —
Whether the society could be said to be engaged in a cottage industry or whether
it could be said to be engaged in a collective disposal of labour of its members
— Though Court did not interfere in the matter in absence of material, a
direction was given to determine the issue having regard to the bye-laws of the
society and Janata Cloth Scheme of the Central Government.


[CIT v. Rajasthan Rajya
Bunker S. Samiti Ltd., (2010) 323 ITR 365 (SC)]

The assessee-society, an
apex society carried on the activity of manufacturing of cloth by supplying raw
material, i.e., yarn, to the weavers, who were the members of the primary
society. The weavers produced cloth strictly in accordance with the directions
given and under the control of the assessee. The assessee paid weaving charges
to the weavers and thereafter marketed and sold the goods so produced. During
the relevant assessment years, cloth was manufactured and sold under the Janata
Cloth Scheme of the Government of India.

For the relevant assessment
years, the assessee claimed a deduction u/s.80P(2)(a)(vi) and u/s.80P(2)(a)(ii)
of the Income-tax Act, 1961 (‘Act’, for short).

The narrow question which
arose for determination before the Supreme Court in those cases was — whether
the assessee-society could be said to be engaged in a cottage industry
u/s.80P(2)(a)(ii) of the Act or whether it could be said to be engaged in the
collective disposal of labour of its members u/s.80P(2)(a)(vi) of the Act ?

It was the contention of the
Department that the weavers were not the members of the apex society. They were
the members of the primary societies. Therefore, the assessee was not entitled
to claim the benefit of deduction u/s.80P(2)(a)(vi) of the Act.

According to the Supreme
Court on both these questions, the Assessing Officer ought to have called for
the bye-laws. It appeared that the bye-laws were not produced before the
Assessing Officer. It appeared that the bye-laws had not been examined by the
Assessing Officer. Further, it was not clear as to whether a weaver could or
could not have become a member of the apex-society under the bye-laws. Even to
answer the question whether the assessee-society was engaged in the cottage
industry, the Department ought to have called for the bye-laws. This exercise
had not been done. In the circumstances, for the relevant assessment years, the
Supreme Court did not interfere with the findings given by the lower courts.
However, the Supreme Court made it clear that this order would not come to the
way of the Department in making assessment for the future assessment years.
However, in such an event, the Department will decide the applicability of S.
80P of the Act [including the proviso to S. 80P(2)] keeping in mind the
provisions of the bye-laws. The said provisions of the bye-laws would point to
the nature of the business of the assessee as also entitlement of the weavers to
become members of the apex society. The Department will examine the Janata
Scheme of the Central Govt. to decide whether the payments made thereunder would
be entitled to deduction u/s.80P(2)(a)(ii) and u/s.80P(2)(a)(vi) of the Act.

levitra

Penalty — Concealment of income — Penalty leviable even in a case where the concealed income reduces the returned loss and finally the assessed income is also a loss or minus figure — Also illustrative guidelines for Courts while writing orders/judgments.

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5 Penalty — Concealment of
income — Penalty leviable even in a case where the concealed income reduces the
returned loss and finally the assessed income is also a loss or minus figure —
Also illustrative guidelines for Courts while writing orders/judgments.


[JCIT v. Saheli Leasing
and Industries Ltd., (2010) 324 ITR 170 (SC)]

On return being filed by the
respondent-assessee, an order u/s.143(3) of the Act was passed on February 28,
1998, showing a total income of Rs. Nil for A.Y. 1995-96.

During the course of
assessment proceedings, it was noticed that the assessee had claimed
depreciation, which was held to be incorrect. Thus, an amount of Rs.24,22,531
was disallowed out of depreciation. Penalty proceedings u/s.271(1)(c) of the Act
were initiated. In response to the show-cause notice issued by the Revenue, the
assessee filed its reply denying the allegations and contending that no penalty
can be imposed on it, when the returned income was nil.

The Deputy Commissioner of
Income-tax, Special Range-2, Surat on the basis of the discussion in the order
held that the assessee was liable to pay penalty, with reference to such
additions to income to be treated as its total income, with reference to
Explanation 4(a) to S. 271(1)(c) of the Act.

Accordingly, the penalty was
levied on concealed income of
`24,22,531 at the
minimum rate of 100 per cent of tax sought to be evaded. Thus, a penalty of
`11,14,364 was imposed on the assessee.

Feeling aggrieved thereby,
the assessee preferred an appeal before the Commissioner of Income-tax
(Appeals). Considering various judgments of the Tribunal and the High Courts,
the appeal of the assessee came to be dismissed and the penalty levied on it
stood confirmed.

The assessee preferred
further appeal before the Income-tax Appellate Tribunal, Ahmedabad. The
Tribunal, on the strength of an earlier order passed by a Special Bench of the
Ahmedabad Tribunal in the case of Apsara Processors (P) Ltd. in ITA No. 284/Ahd./2004,
dated December 17, 2004, came to the conclusion that no penalty can be levied if
the returned income and the assessed income is loss. Accordingly, the orders
passed by the Assessing Officer as well as the Commissioner of Income-tax
(Appeals) were set aside and quashed and the penalty imposed on the assessee was
deleted. It was this order of the Tribunal which was carried further by filing
appeal u/s.260A of the Act in the High Court, which met the fate of dismissal by
the Division Bench.

However, the Division Bench
in its wisdom thought it fit to dispose of the appeal as under :

“Admitted facts are that the
appellant had filed return showing loss and the income is also assessed as ‘nil
income’. When the return was shown as loss as well as assessment of income is
also nil, no penalty u/s.271(1)(c) of the Income-tax Act is attracted. No case
is made out for admission of the appeal. The appeal stands dismissed at the
admission stage.

(Sd.)………………………….
Judge

(Sd.)………………………..
Judge”

On a further appeal, the
Supreme Court found that the Division Bench of the High Court in the impugned
order had decided the question of law as projected before it in the appeal
preferred u/s.260A of the Act, in a most casual manner. The order was not only
cryptic, but did not even remotely deal with the arguments which were sought to
be projected by the Revenue before it.

The Supreme Court observed
that it had, time and again, reminded the Courts performing judicial functions,
the manner in which judgments/orders are to be written but, it was, indeed,
unfortunate that those guidelines issued from time to time were not being
adhered to.

The Supreme Court further
observed that no doubt it is true that brevity is an art, but brevity without
clarity is likely to enter into the realm of absurdity, which is impermissible.

The Supreme Court therefore,
before proceeding to decide the matter on the merits, reiterated few guidelines
for the Courts, while writing orders and judgments to follow the same,
clarifying that the guidelines were only illustrative in nature, not exhaustive
and could further be elaborated looking to the need and requirement of a given
case :

(a) It should always be
kept in mind that nothing should be written in the judgment/order, which may
not be germane to the facts of the case. The ratio decided should be clearly
spelt out from the judgment/order.

(b) After preparing the
draft, it is necessary to go through the same to find out, if anything,
essential to be mentioned, has escaped discussion.

(c) The ultimate finished
judgment/order should have sustained chronology, regard being given to the
concept that it has readable, continued interest and one does not feel like
parting or leaving it midway. To elaborate, it should have flow and perfect
sequence of events, which would continue to generate interest in the reader.

(d) Appropriate care
should be taken not to load it with all legal knowledge on the subject as
citation of too many judgments creates more confusion than clarity. The
foremost requirement is that leading judgments should be mentioned and the
evolution that has taken place ever since are pronounced and thereafter, the
latest judgment, in which all previous judgments have been considered, should
be mentioned. While writing judgment, psychology of the reader has also to be
borne in mind, for the perception on that score is imperative.

(e) Language should not be
rhetoric and should not reflect a contrived effort on the part of the author.

<

Agreement — Law permits the contracting parties to lawfully change their stipulations by mutual agreement

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  1. (a) Agreement — Law permits the contracting parties to
    lawfully change their stipulations by mutual agreement



(b) Income — Accrual — Variation in the contract from an
earlier date would not affect the accrual of income for the earlier period


(c) Penalty for filing untrue estimate — Can be imposed
only if the assessee knew that the estimate was untrue or had reason to
believe that it was untrue.


[CIT v. Sarabhai Holdings P. Ltd., (2008) 307 ITR 89
(SC)]

The assessee, which was previously known as Sarabhai
Chemicals Pvt. Ltd. and has become Sarabhai Holdings Pvt. Ltd. is referred to
as ‘the assessee’ for short.

There was an agreement on February 28, 1977, whereby the
assessee agreed to transfer its industrial understanding and business activity
known as Sarabhai Common Services Division, which was its unit. This was to
take place with effect from March 1, 1997. The unit was sold as going concern
in favour of the assessee’s own subsidiary M/s. Elsope Pvt. Ltd. for a total
consideration of Rs.11,44,10,253.

Under this agreement, the amount of Rs.4.41 crores was to
be set off against the amount due from the respondent-assessee to Elscope Pvt.
Ltd. as consideration for equity shares in Elscope held by the respondent-assesssee.
The balance sale consideration (approx. Rs.6.55 crores ) was to be paid in
eight equal annual instalments, starting with October 1, 1979. Such instalment
was to become payable on the 1st of October each year.

A further agreement was entered into between the assessee
and Elscope on March 4, 1977. This agreement had an interest clause, which was
provided for at the rate of 11% per annum and that it would be payable on the
balance sale consideration which would remain unpaid from time to time.

Elscope, in turn, transferred this industrial undertaking,
purchased by it to its subsidiary Ambalal Sarabhai Enrterprises Ltd. on April
25, 1978, vide the assignment deed of even date. On June 15, 1978, Elscope
wrote to the respondent-assessee proposing modification in terms of payment
and requested, inter alia, that the interest be charged on the deferred
sale consideration from 01.07.1979, instead of 01.03. 1977. It was proposed by
this letter, firstly, that Rs.1.84 crores (approx.) will be payable as and
when demanded by the respondent-assessee and will not carry any interest and,
secondly, that Rs.4.7 crores will be payable in 5 annual instalments, the
first instalment becoming payable on March 1, 1987, and the said amount shall
carry simple interest at the rate of 11% per annum with effect from July 1,
1979. Elscope also offered to secure the amount of 4.7 crores to the
satisfaction of the respondent-assessee.

On 30.6.1978, the proposal sent by Elscope, vide letter
dated June 15, 1978, was decided to be accepted by the assessee and a
resolution to that effect was passed in the meeting of the board of directors.

In keeping with its proposal, Elscope furnished to the
respondent-assessee secured bonds of Ambalal Sarabhai Enterprises Ltd. and as
proposed in the letter dated June 15, 1978, the interest was to start from
July 1, 1979, while , before this interest was to start, the resolution dated
June 30, 1978, was passed, doing away with the requirement of payment of
interest in terms of the earlier agreement dated March 4, 1977.

The assessee received a notice u/s.210 of the Act on
October 17, 1978, requiring it to pay advance tax of Rs.1,22,22,757, while the
second notice was served on December 8, 1978, asking the respondent-assessee
to pay advance tax of Rs.1,28,74,172.

On 14.12.1978, however, the respondent-assessee filed an
estimate, showing nil amount of advance tax payable for the A.Y. 1979-80. It
further filed the returns on June 29, 1979, declaring the total income of
Rs.772 for the A.Y. 1979-80. Insofar as A.Y. 1980-81 was concerned, the
assessee filed the returns on June 27, 1980, declaring a loss of Rs.17,245.
The Assessing Officer passed an assessment order dated September 20, 1982,
determining the total income to be Rs.68,99,202, which included the amount of
interest accrued on the deferred sale consideration, receivable from Elscope.
The Assessing Officer also levied interest u/s.215 of the Act on a finding
that the assessee had failed to pay advance tax. The Assessing Officer also
directed that the penalty proceedings u/s.273(2)(a) and u/s.271(1)(c) of the
Act should be initiated against the assessee.

Insofar as A.Y. 1980-81 was concerned, an addition of
income by way of interest on the deferred sale consideration was taken into
account and the amount of Rs.55 lakhs (approx.) was added to the taxable
income of the assessee.

The Commissioner of Income-tax (Appeals) upheld the
assessment orders in both the assessment years and also confirmed the addition
of interest amount to the income of the assessee. The Appellate Authority
refused to accept the plea regarding waiver of interest by resolution dated
June 30, 1978.

For A.Y. 1979-80 the Tribunal held that the interest had
already accrued vide further agreement dated March 4, 1977, and as such, the
resolution dated June 30, 1978, was of no consequence, as there was no
commercial expediency for making it retrospectively operative. However, it
accepted the plea as regards interest u/s.215 of the Act. The Tribunal viewed
the question involved to be a highly complex issue and held that the mere fact
that the decision had gone against the assessee could not be viewed as being
determinative of the assessee’s liability to pay advance tax.

So far as A.Y. 1980-81 was concerned, the Tribunal held
that the amount of interest could not be included in the income of the
assessee, since the resolution dated June 30, 1978 was passed prior to the
commencement of the relevant accounting year, which was July 1, 1978 to June
30, 1979, and, therefore, it could not be said that the interest income had
accrued.

The Tribunal also held that it was permissible for the
parties to alter the agreement regarding the charging of interest in the wake
of the fact that the said resolution was found to be a genuine resolution. The
Tribunal came to the finding that interest could not have accrued insofar as
A.Y. 1980-81 was concerned.

High Court — Appeal lies only when substantial question of law is involved — Cash credits — Where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as income of the assessee of that previou

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16 High Court — Appeal lies only when substantial question of
law is involved — Cash credits — Where any sum is found credited in the books of
the assessee for any previous year, the same may be charged to income-tax as
income of the assessee of that previous year, if the explanation offered by the
assessee about the nature and source thereof is in the opinion of the Assessing
Officer, not satisfactory.


[Vijay Kumar Talwar v. CIT, (2011) 330 ITR 1 (SC)]

The assessee was a partner in a firm, named and styled as
M/s. Des Raj Tilak Raj, having its business at Delhi, with a branch at Calcutta.
The said partnership firm was dissolved with effect from April 1, 1982. As per
dissolution deed, the assessee took over the business of the Calcutta branch of
the erstwhile firm. Thereafter, from October 21, 1982, the assessee started a
proprietary concern by the name of M/s. Des Raj Vijay Kumar.

On May 27, 1983, a search took place at the assessee’s
premises during which certain incriminating documents were recovered and seized.
During the course of assessment proceedings for the A.Y. 1983-84, for which the
previous year ended on March 31, 1983, the Assessing Officer examined the seized
record. One of the registers so examined, revealed cash receipts of Rs.3,49,991
in the name of 15 persons, most of which were purportedly received during the
period of April, 1982 to October, 1982. When the Assessing Officer sought an
explanation from the assessee with regard to the said cash credits in the
register, the assessee merely stated that the cash receipts were in the nature
of realisations from the past debtors of the erstwhile firm. In order to
appreciate the said stand, the Assessing Officer called for the account books of
the Calcutta branch of the erstwhile firm for the relevant period, but the
assessee failed to produce them. The Assessing Officer also examined the
assessee’s brother, a partner in the erstwhile firm, who also stated that the
account books were not available.

Having noted that the outstanding realisations of the
Calcutta branch in the preceding years varied from Rs.25,000 to Rs.30,000, the
Assessing Officer held that the assessee’s submission that cash receipts of
Rs.3,49,991 related to earlier years was untenable. Therefore, the Assessing
Officer added a sum of Rs.3,49,991 as the assessee’s income under the head
‘unexplained cash receipts’.

Aggrieved, the assessee appealed to the Commissioner of
Income-tax (Appeals) who dismissed the same and confirmed the addition made by
the Assessing Officer.

Being still aggrieved, the assessee carried the matter in
appeal before the Tribunal. The Tribunal remitted the matter back to the
Assessing Officer for de novo adjudication. The Tribunal inter alia observed
that some of the entries pertained to the period when the erstwhile firm was in
existence, whereas the assessee did not conduct business at Calcutta in a
proprietary capacity but was only a partner in the erstwhile firm.

Pursuant to the Tribunal’s order, the Assessing Officer asked
the assessee to file confirmations of the 15 parties in whose names cash credit
entries appeared in the register seized. In reply, the assessee filed
confirmations of seven parties with address of other six parties. The Assessing
Officer considered the two remaining parties as non-existent. The Assessing
Officer did not accept the confirmation filed because they were identical and it
did not contain GIR No. Also, when the letters were sent to those parties, four
letters were returned unserved, and one of the parties denied any relationship
with the firm. Out of the letter sent to six parties whose addresses had been
supplied, three did not respond, while two others denied any relationship with
the firm and remaining one letter was returned unserved. The Assessing Officer
therefore confirmed the original assessment. The assessee preferred an appeal
before the Commissioner of Income-tax (Appeals), which was dismissed. Still not
being satisfied, the assessee carried the matter in appeal before the Tribunal.
The Tribunal, held that the addition of Rs.3,49,991 was correct.

The assessee moved an application u/s.254(2) of the Act
before the Tribunal for rectification of mistakes in the order of the Tribunal,
which was rejected by the Tribunal.

The assessee preferred an appeal before the High Court
u/s.260A of the Act, which was dismissed holding that the findings recorded by
the Commissioner of Income-tax (Appeals) and the Tribunal were findings of fact
and no substantial question of law arose for consideration.

On further appeal, the Supreme Court held that it was
manifest from a bare reading of the Section that an appeal to the High Court
from a decision of the Tribunal lies only when a substantial question of law is
involved, and where the High Court comes to the conclusion that a substantial
question of law arises from the said order, it is mandatory that such questions
must be formulated. The expression ‘substantial question of law’ is not defined
in the Act. Nevertheless, it has acquired a definite connotation through various
judicial pronouncements. The Supreme Court referred to its decisions in Sir
Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd.,
AIR 1962 SC 1311, Santosh Hazari v. Purushottam Tiwari, (2001) 3 SCC 179,
Hero Vinoth. (Minor) v. Seshammal, (2006) 5 SCC 545, Madan Lal v. Mst.
Gopi, (1980) 4 SCC 255 and Ors., in this regard.

Examining on the touch-stone of the principles laid down in the aforesaid decisions, the Supreme Court was of the opinion that in the instant case the High Court had correctly concluded that no substantial question of law arose from the order of the Tribunal. The Supreme Court observed that all the authorities below, in particular the Tribunal, had observed in unison that the assessee did not produce any evidence to rebut the presumption drawn against him u/s.68 of the Act, by producing the parties in whose name the amounts in question had been credited by the assessee in his books of account. In the absence of any evidence, a bald explanation furnished by the assessee about the source of the credits in question viz. realisation from the debtors of the erstwhile firm, in the opinion of the Assessing Officer, was not satisfactory. The Supreme Court held that it was well settled that in view of S. 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of that previous year, if the explanation offered by the assessee about the nature and source thereof is in the opinion of the Assessing Officer, not satisfactory. The Supreme Court was of the opinion that on a conspectus of the factual scenario, the conclusion of the Tribunal to the effect that the assessee had failed to prove the source of the cash credits could not be said to be perverse, giving rise to a substantial question of law. The Tribunal being the final fact finding authority, in the absence of demonstrated perversity in its finding, interference therewith by the Supreme Court was not warranted.

[Note : The decisions referred to in the judgment explains as to what is a substantial question of law and when findings of fact gives rise to question of law.]

Capital or revenue expenditure – Replacement of machinery in a spinning mill is not revenue expenditure.

New Page 1

25 Capital or revenue expenditure – Replacement of machinery
in a spinning mill is not revenue expenditure.



[A]
CIT vs. Sri Mangayarkar
Mills P. Ltd. [2009] 315 ITR 114 (SC)

Entries in the book of accounts may not be determinative as
to the nature of expenditure but were indicative of what the assessee himself
thinks of the expenditure.

The respondent assessee was engaged in the manufacture and
sale of cotton yarn. During the assessment year 1995-96, the assessee claimed an
amount of

Rs.61, 28,150 as being expenditure incurred on replacement of
machinery as revenue expenditure. The assessee believed that such expenditure
was merely expenditure on replacement of spare parts in the spinning mill system
and, therefore, amounted to revenue expenditure. The Assessing Officer (AO) did
not, however, accept this view of the assessee. According to him, each machine
in a spinning mill performs a different function and the product from one
machine is taken and manually fed into another machine and the output obtained.
All the machines are thus not integrally connected. Based on this reasoning, the
Assessing Officer disallowed the above claim of the assessee and held the said
expenditure to be of a capital nature. The AO further held that the assessee had
treated the said expenditure as capital expenditure by capitalizing the assets
in the books of account and had, thus, shown profit in its profit and loss
account to third parties like bankers, financial institutions, creditors,
shareholders, etc. However, from the tax point of view, the respondent wanted to
reduce the net profit and the total taxable income by claiming such huge
expenditure in the statement of total income computation for acquisition of
fixed assets as revenue expenditure. The AO further held that the assessee could
claim depreciation on the said assets as per Income-tax Rules.

On an appeal, the Commissioner of Income Tax (Appeals)
allowed the appeal of the assessee, inter alia, holding that the replacement of
machinery by the assessee in this case constituted revenue expenditure.

On appeal by the Revenue, the Tribunal followed the decision
of the Madras High Court wherein it was decided that replacement of the ring
frame constitutes only replacement of a part of the machinery in textile mills.
The Tribunal thus upheld the order of the Commissioner of Income-tax (Appeals)
and dismissed the appeal of the Revenue.

The High Court, relying on its own decision in CIT vs.
Janakiram Mills Ltd. [2005] 275 ITR 403 (Mad) and CIT vs. Loyal Textile Mills
Ltd. [2006] 284 ITR 658 (Mad), dismissed the appeal filed by the Revenue and
held that the expenditure on replacement of machinery was revenue in nature. The
High Court further held that the question whether the expenditure on replacement
of machinery was capital or revenue in nature was not determined by the
treatment given to it by the assessee in the books of account or in the
balance-sheet. The claim had to be determined only by relying on the provisions
of the Act and not by the accounting practice followed by the assessee.

On further appeal, the Supreme Court observed that the first
issue was whether each machine in a textile mill is an independent item or
merely a part of a complete spinning textile mill, which only together are
capable of manufacture — and there is no intermediate product produced.
According to the Supreme Court, this issue had been satisfactorily answered by
its decision in CIT vs. Saravana Spinning Mills P. Ltd. [2007] 293 ITR 21 (SC).
In that case, the court had held unambiguously that “each machine in a segment
of a textile mill has an independent role to play in the mill and the output of
each division is different from the other.” The Supreme Court thus held that
each machine in a textile mill should be treated independently as such and not
as a mere part of an entire composite machinery of the spinning mill. It can at
best be considered part of an integrated manufacture process employed in a
textile mill.

On the issue of “current repairs” under section 31 of the
Act, in CIT vs. Saravana Spinning Mills P. Ltd. (Supra), it has been laid down
that in order to determine whether a particular expenditure amounted to “current
repairs”, the test was “whether the
expenditure was incurred to preserve and maintain”, an already existing asset
and not to bring a new asset into existence or to obtain a new advantage. For
“current repairs” determination, whether the expenditure was “revenue or capital
was not the proper test”.

The Supreme Court held that replacement of such an old
machine with a new one would constitute the bringing into existence of a new
asset in place of the old one and not repair of the old and existing machine.
Thus, replacement of assets as in the instant case could not amount to “current
repairs”, and the expenditure made by the assessee could not be allowed as a
deduction under Section 31 of the Act.

The Supreme Court observed that given that Section 31 of the
Act was not applicable to the said expenditure of the assessee, the next issue
was whether it could be considered “revenue expenditure” of the nature envisaged
under Section 37 of the Act. The Saravana Mills’ case held that the expenditure
was deductible under Section 37 only if it: (a) was not deductible under Section
30-36, (b) was of a revenue nature, (c) was incurred during current accounting
year, and (d) was incurred wholly and exclusively for the purpose of the
business. According to the Supreme Court, the assessee’s expenditure satisfied
requirements (a), (c) and (d) as stated above. The dispute was with respect to
the nature of expenditure, that is, whether it was revenue or capital in nature.
The Supreme Court was of the opinion that the expenditure of the assessee in
this case was capital in nature.

Before concluding, the Supreme Court observed that it was
clear on record that the assessee had sought to treat the said expenditure
differently for the purpose of computing its profit and for the purpose of
payment of income-tax. The said expenditure had been treated as an addition to
existing assets in the former and as revenue expenditure in the latter. Though
accounting practices may not be the best guide in determining the nature of
expenditure, in this case they were indicative of what the assessee itself
thought of the expenditure it made on replacement of machinery, and that the
claim for deduction under the Act was made merely to diminish the tax burden,
and not under belief that it was actually revenue expenditure.

 

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Co-operative Society – Deduction under Section 80P(2)(e): An assessee-society engaged in distribution of controlled commodities on behalf of the government under Public Distribution System and getting commission is not entitled to deduction under section

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26 Co-operative Society – Deduction under Section 80P(2)(e):
An assessee-society engaged in distribution of controlled commodities on behalf
of the government under Public Distribution System and getting commission is not
entitled to deduction under section 80P(2)(e), as it earned its income from
business and not from letting of godowns or warehouses for the purpose of
storage, processing or facilitating the marketing of commodities.



[B]
Udaipur Sahakari
Upbhokta Thok Bhandar Ltd. vs. CIT [2009] 315 ITR 21 (SC)


The appellant, a co-operative society registered under the
Rajasthan Co-operative Societies Act, 1965, was running a consumer co-operative
store at Udaipur since 1963. It had 30 branches. The appellant was dealing in
non-controlled commodities through its branches. In addition, the appellant was
also doing the work of distribution of controlled commodities such as wheat,
sugar, rice and cloth on behalf of the government under the public distribution
scheme (PDS) for which it was getting commission. The distribution of the
controlled commodities was regulated by the District Supply Officer (DSO
–Authorized Officer) under the Rajasthan Foodgrains and other Essential Articles
(Regulation of Distribution) Order, 1976 (for short, “the 1976 Order”). The
appellant claimed to be stockist/distributor of controlled commodities. It took
delivery from the Food Corporation of India (FCI) and the Rajasthan Rajya
Upbhokta Sangh, as per the directives of the state government. The price,
quantity and the person from whom the delivery was to be taken was fixed by the
state government under the said 1976 Order. After taking the delivery, the
appellant stored these goods in its godowns, both owned and rented. The storage
godowns were open to checking by the concerned officers of the state government.
The stocks stored by the appellant were delivered to fair price shops
(FPS-retailers), as per the directives of the state government. The quantity
price and the FPS to whom the delivery was to be given, were fixed by the state
government. According to the appellant, therefore, the above modus operandi
indicated that the state government exercised total control over the stock of
controlled commodities stored in the godowns of the appellant-society. On
February 28, 1977, the appellant was granted licence for purchase/sale/storage
for sale of foodgrains under the Rajasthan Foodgrains Dealers Licensing Order,
1964.

 

On August 31, 1990, the appellant filed its returns for the
assessment year 1989-90, claiming deduction under section 80P(2)(e) of the 1961
Act on the income of commission received by it from the government for storage
of controlled commodities. The appellant later filed its returns of income for
the subsequent assessment years 1990-91, 1991-92, 1992-93, 1993-94, 1994-95,
1995-96, inter alia, claiming deduction on the income of commission received by
it from the state government for storage of controlled commodities. Vide order
dated March 26, 1992, the AO (Assessing Officer) disallowed the claim on the
ground that the appellant-society was a wholesaler of foodgrains and it was not
a mere stockist as claimed, and consequently, it was not entitled to deduction
under section 80P(2)(e) of the 1961 Act. This order was applied for the
assessment years in question. Aggrieved by the assessment order(s), the
appellant filed appeals before the Commissioner of Income-tax (Appeals). The
Commissioner of Income-tax (Appeals) held that the appellant was entitled to
deduction under section 80P(2)(e) of the 1961 Act on the income of commission
received from the state government for stocking the above foodgrains. This
decision was affirmed by the Tribunal, vide its decision dated October 20, 2000,
dismissing the department’s appeal by a common order holding that the appellant
was entitled to deduction under the said section. This view of the Tribunal,
however, was overruled by the decision dated November 2, 2006, of the Rajasthan
High Court which took the view that the appellant-society was storing the said
controlled commodities in its godowns as part of its own trading stocks; that
the appellant acted as a trader in the essential commodities in question and
consequently the appellant was not entitled to deduction under section 80P(2)(e)
of the 1961 Act. Against the impugned decision, the appellant went to the
Supreme Court by way of petition for special leave.

The Supreme Court, at the outset, noted that the appellant
had composite business. The appellant was a dealer in non-controlled commodities
and it was an authorization holder in respect of controlled commodities under
the 1976 Order. It owned godowns and it also hired godowns on rent. It earned
commission during the relevant assessment years at the rate of 2.25 per quintal
(e.g. for rice). Under clause 20 of the 1976 Order, every authorization holder
had to comply with general or special directions given in writing from time to
time by the Collector in regard to purchase, sale, storage for sale,
distribution and disposal of controlled commodities. The Supreme Court further
noted that the appellant earned commission on the principle of “netting”. In
other words, the appellant set off “issue price” against “sale price” and
retained commission fixed at Rs.2.25 per quintal.

The Supreme Court, referring to the rate fixation mechanism
indicated by one of the orders issued on 12th March, 1987, w.e.f. 1st May, 1987
and adverting to the working given therein, observed that the said working
indicated that Rs.247.82 (issue price) was treated by the appellant as expense
and it was set off against the sale price of Rs.251.07. In other words, the
working indicated cost plus mechanism, i.e. Rs.247.82 was the cost plus profit
margin which included Rs.2.25 as commission. Therefore, Rs.2.25 was part of the
profit margin. The Supreme Court, referring to the written submissions filed by
the appellant, observed that the appellant had taken into its books of account
the consolidated value of the closing stock. According to the Supreme Court, the
circumstances reinforced the finding of the High Court in its impugned judgement
that the appellant was storing the commodities in its godowns as a part of its
own trading stock.

The Supreme Court noted that Section 81(iv), followed by the
Section 14(3)(iv) in the 1922 Act (as amended) was a predecessor to Section
80P(2)(e) of the 1961 Act; and it had come up for consideration before the
Gujarat High Court in the case of Surat Venkar Sahakari Sangh Ltd. vs. CIT
[1971] 79 ITR 722. In that case, it was inter alia held that:

(i) On a plain natural construction of the language used in
section 81(iv) that what is exempted under that section is income derived from
the letting of godowns or warehouses, provided the letting is for any of the
three purposes, namely, ‘storage’, ‘processing’ or ‘facilitating the marketing
of commodities”.

ii) On a proper interpretation of Section 14(3) (iv) and Section 81(iv), separate exemption is not granted in respect of income from the letting of godowns or warehouses for storage, income from processing and income from facilitating the marketing of commodities. But the exemption is available only in respect of income derived from letting of godowns or warehouses where the purpose of letting is storage, processing or facilitating the marketing of commodities.

The Supreme Court approved the reasoning given by the Gujarat High Court on the interpretation of Section 81(iv) and Section 14(3)(iv) of the 1922 Act. The Supreme Court held that on reading the above judgement, it became clear that under Section 80P(2) of the 1961 Act, an assessee is entitled to claim special deduction from its gross total income to arrive at total taxable income. The burden is on the assessee to establish that exemption is available in respect of income derived from the letting of godowns or warehouses, only where the purpose of letting is storage, processing or facilitating the marketing of commodities.

According to the Supreme Court two points arose for its determination, namely, whether the appellant acted as an agent of the government in the subject transaction, and the real nature of the payment received by the said society under the head “commission”. In the view of the Supreme Court, both the points stood covered by the judgement of the Supreme Court in A. Venkata Subbarao vs. State of Andhra Pradesh, AIR 1965 SC 1773. In that case, it was inter alia held that the margin or difference in the purchase and sale price was necessary in order to induce any one to engage in this business, and it was of the essence of a control over procurement and distribution which utilized normal trade channels. It would, therefore, be a misnomer to call it ‘remuneration’ or ‘commission’ allowed to an agent; and so, really no argument could be built on it in favour of the relationship being that of principal and agent. Coming to the question of agency, it was held that the government can derive no advantage from the words “procurement agent” mentioned in the Procuring Order, 1946, from the agreement executed by such procuring agent. The court specifically dismissed the argument advanced on behalf of the government that A. Vernkata Subbarao (appellant) had acted as an “agent” on behalf of the government.

Applying its judgement in the case of A. Venkata Subbarao, the Supreme Court held that the High Court was right in coming to the conclusion that the assessee was storing the commodities in question in its godowns as part of its own trading stock, hence, it was not entitled to claim deduction for such margin under Section 80P(2)(e) of the 1961 Act.

Recovery of Tax — Strangers to the decree are afforded protection by the Court because they are not connected with the decree.

New Page 1

 15 Recovery of Tax — Strangers to the decree
are afforded protection by the Court because they are not connected with the
decree.


[Janatha Textiles & Ors. v. Tax Recovery Officer & Anr.,
(2008) 301 ITR 337 (SC)]

The appellant M/s. Janatha Textiles was a registered firm
with four partners, viz., Radhey Shyam Modi, Pawan Kumar Modi, Padmadevi
Modi and Indira Chirmar. The firm and its partners were in arrears of tax for
the A.Ys. 1985-86, 1986-87, 1987-88, 1989-90. All the demands pertaining to the
A.Ys. 1986-87 to 1989-90 had been stayed by various income-tax authorities and
these demands were never enforced for collection. The demand pertaining to the
A.Y. 1985-86 was alone enforced.

 

The agricultural lands owned by the partners of the
appellant-firm at Bodametlapalem had been attached and sold in public auction on
August 5, 1996, after following the entire procedure laid down under the Second
Schedule to the Income-tax Act, 1961. Nine people participated in the public
auction held on August 5, 1996. The sale was confirmed in favour of L. Krishna
Prasad who offered the highest price. No procedural irregularity or illegality
in public auction process was alleged by the appellant.

 

Even after issuance of sale proclamation, the
respondent-Department issued communication in SR No. 2/94 dated July 15, 1996,
informing the appellants that a sum of Rs.5,68,913 was due as on that date
towards tax, interest and penalty under the 1961 Act. The said amount, however,
does not include interest payable u/s.220(2) of the 1961 Act. The appellant-firm
acknowledged receipt of the letter on July 17, 1996, and had not contradicted
the quantum of tax and interest as mentioned in the said letter. It was made
clear that the demand for the A.Y. 1985-86 alone was being enforced.

 

In an SLP, learned counsel for the appellants contended that
even though they had filed objections at various stages of the notice issued for
the auction sale, the respondent-Department without disposing of the said
objections proceeded with the sale and, therefore, on that ground the sale
conducted by the respondent-Department was illegal and unsustainable. The
appellants further submitted that with reference to the A.Y. 1985-86, the
application for waiver of interest was pending before the authorities and
further the stay application filed before the Commissioner was not disposed of.
Even on that count also the sale conducted by the respondent-Department on
August 5, 1996, was illegal and unsustainable. The appellant contended that the
High Court had failed to notice that the nature of the lands in the auction
notice was wrongly mentioned as dry lands. In fact the said lands were a mango
orchard and building structure and of much higher value. The auction ought to be
vitiated on this ground alone.

 

The appellant also submitted that the appellants had received
the notice of demand as defaulters in their individual capacity and also as the
partners of the firm. However, the respondent-Department had failed to give
notice of demand to the appellants qua their shares. They did not receive
notices indicating their respective shares. It was asserted on behalf of the
respondent-Department that the amount fetched in the public auction was more
than reasonable.

 

The Supreme Court observed that the appellant had never
complained about fixing of the reserve price before holding of auction, though
they were intimated of the same through sale proclamation. In pursuance of the
notice issued by the Supreme Court, the respondent-Department had filed the
counter-affidavit. Respondent No. 2 (auction purchaser) also had filed a
separate counter-affidavit. Respondent No. 2 in the counter-affidavit stated
that it was totally incorrect to suggest that the auction sale did not fetch the
actual market value of the property. Respondent No. 2 also mentioned in the
counter-affidavit that the said lands were agricultural dry lands and there were
no mango gardens as alleged by the appellant. There were, however, a few mango
trees scattered all over the land.

 

The respondent-Department in the counter-affidavit stated
that the appellant-firm had alternative efficacious remedy by way of filing a
petition under Rules 60 and 61 of the Second Schedule to the 1961 Act. The
appellant ought to have availed of the statutory remedy for ventilating its
grievances instead of filing a petition before the High Court.

 

The Supreme Court further observed that there was another
very significant aspect of this case, which pertained to the rights of the
bona fide purchaser for value. The Supreme Court held that the law makes a
clear distinction between a stranger who is a bona fide purchaser of the
property at an auction sale and a decree-holder purchaser at a court auction.
Strangers to the decree are afforded protection by the Court, because they are
not connected with the decree. Unless the protection is extended to them court
sales would not fetch the market value or fair price of the property. The
Supreme Court held that the appeal was devoid of any merit and was accordingly
dismissed.

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Export — Deduction u/s.80HHC — Duty drawback and cash compensatory allowance received in the year other than the year of exports is eligible for deduction u/s.80HHC of the Act in the year of receipt, in a case where assessee is following the cash system o

New Page 1

 14 Export — Deduction u/s.80HHC — Duty
drawback and cash compensatory allowance received in the year other than the
year of exports is eligible for deduction u/s.80HHC of the Act in the year of
receipt, in a case where assessee is following the cash system of accounting.


[B. Desraj v. CIT, (2008) 301 ITR 439 (SC)]

The appellant was a sole proprietor of M/s. D. R. Enterprises
engaged in the business of export of textiles/fabrics. Consequent upon exports
made by him, inward remittance came into India in foreign exchange during the
accounting year ending 31-3-1991 (A.Y. 1990-91). However, the appellant
recovered cash compensatory allowance of Rs.7,74,785 and duty drawback of
Rs.35,565 in the next accounting year ending on 31-3-1992 (A.Y. 19991-92). The
appellant, who was following cash system of accounting, claimed deduction
u/s.80HHC on the aforesaid amounts in A.Y. 1991-92, that is, in the year of
receipt.

 

According to the AO, admittedly, the appellant had not made
export sales during A.Y. 1991-92 and therefore, the said duty drawback and cash
compensatory allowance did not constitute eligible income deductible from the
gross total income u/s. 80HHC. On appeal, the Commissioner of Income-tax
(Appeals) took the view that the above amounts were admittedly relatable to the
sales made during the earlier year and consequently, the Assessing Officer had
wrongly rejected the appellant’s claim for deduction u/s.80HHC. The Tribunal
upheld the decision of the Commissioner of Income-tax (Appeals).

 

On an appeal by the Department, the Madras High Court
overruled the decision of the Tribunal on the ground that during the A.Y.
1991-92, the assessee had received cash compensatory support and duty drawback
for the exports made in the earlier year and that there were no exports made in
that year and therefore, the said amounts did not constitute eligible income for
deduction u/s.80HHC.

 

On an appeal by the appellant, the Supreme Court
observed that by the Finance Act, 1990 it was clarified that cash compensatory
support and duty drawback would be taxable u/s.28(iiib) and in a Circular issued
by the CBDT it was clarified that export incentives, namely, cash compensatory
support and duty drawback have to be included in the profits of the business for
computing the deduction u/s.80HHC. According to the Supreme Court, with the
issuance of the said Circular, the point was no more res integra.
The Supreme Court after noting the formula for the purpose of computing
deduction u/s.80HHC observed that the business profits included export
incentives. The Supreme Court, therefore, held that the words ‘business profits’
in the formula u/s. 80HHC(3) would include cash compensatory allowance and duty
drawback, and the AO was directed to work out the deduction in accordance with
the law as it stood during the relevant A.Y. 1991-92.

 

 

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Appeal to Appellate Tribunal : Fees : S. 2(45), S. 5 and S. 253(6) of Income-tax Act, 1961 : A.Y. 2003-04 : Total income determined at negative figure : Fees of Rs.500 alone is payable.

New Page 1

  1. Appeal to Appellate Tribunal : Fees : S. 2(45), S. 5 and S.
    253(6) of Income-tax Act, 1961 : A.Y. 2003-04 : Total income determined at
    negative figure : Fees of Rs.500 alone is payable.


[Gilbs Computer Ltd. v. ITAT, 317 ITR 159 (Bom.)]

For the A.Y. 2003-04 the assesse’s total income was
assessed at a loss of Rs.7,18,78,768. While filing appeal before the Tribunal
u/s.153 of the Income-tax Act, 1961 the assessee paid appeal fees of Rs.500.
The registry of the Tribunal communicated the defect inasmuch as the appeal
fee paid was less by Rs.9,500 and called upon the petitioner to rectify the
defect within 10 days. The petitioner did not pay the additional amount.
Therefore the Tribunal dismissed the petitioner’s appeal as unadmitted.

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

“(i) The expressions ‘more’ or ‘less’ in S. 253(6) of the
Act have to be given their natural meaning. Negative income cannot be
‘more’. It will always be less. In that event the language of Ss.(6)(a)
would be attracted. If the total income can be considered even to be a loss
then the absence of it will not be covered by either clause (a), (b) or (c)
of Ss.(6). It will be clause (d) of Ss.(6) which will apply.

(ii) The petitioner was not obliged to pay the fee in
excess of Rs.500. The petitioner had been admittedly assessed to loss. The
income computed was less than Rs.1,00,000 and, therefore, clause (a) of S.
253(6) would apply.

(iii) If on the other hand, one took the view that clause
(a), (b) or (c) would not apply as they postulate assessment of a positive
figure, only clause (d) would apply and, even so, the fee payable would be
Rs.500. The petitioner was right in paying court fee of Rs.500.”

 



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Prosecution : Willful attempt to evade tax and false verification : S. 276C and S. 277 : Firm : Partners liability : Failure by prosecution to adduce evidence to show partners had active role in business : Trial Judge acquitting accused : Proper.

New Page 1

21 Prosecution : Willful attempt to evade
tax and false verification : S. 276C and S. 277 of Income-tax Act, 1961 : A.Y.
1981-82 : Firm : Partners liability : Failure by prosecution to adduce evidence
to show partners had active role in business : Trial Judge acquitting accused :
Proper.


[UOI v. Nalinidevi and another, 304 ITR 382 (MP)]

The accused in this case were partners of the assessee firm.
The two accused set up the defence that they being only housewives were not in
charge of the business of the firm. On the basis of the evidence led by the
prosecution, the trial judge found that the two individual members of the firm
were not guilty of any offence and as such they were acquitted.

 

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

“(i) Every partner of the firm is an agent and thus
vicariously liable, but that liability is restricted only to civil liability
and does not extend to criminal liability. The burden is always upon the
prosecution to prove that the accused person had an active role to play in the
business of the firm.

(ii) As the prosecution had failed to adduce any evidence to show that the
acquitted women had any active role to play in the business of the firm, the
Trial Court had no option but to acquit the accused members of the firm.”

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Prosecution : Delay in filing return and false statement : S. 276CC and S. 277 : No evidence that delay was willful : Acquittal by criminal court : High Court would not interfere merely because another view possible.

New Page 1

20 Prosecution : Delay in filing return and
false statement : S. 276CC and S. 277 of Income-tax Act, 1961 : A.Y. 1981-82 :
No evidence that delay was willful : Acquittal by criminal court : High Court
would not interfere merely because another view possible.


[UOI v. Dinesh, 304 ITR 345 (MP)]

For the A.Y. 1981-82 the assessee accused had filed the
return of income disclosing income of Rs.52,997. Thereafter the assessee filed a
revised return on 16-4-1983. On a complaint filed by the Department for offences
u/s.276CC and u/s.277 of the Income-tax Act, 1961 the Trial Court acquitted the
accused assessee.

 

The Department filed appeal before the Madhya Pradesh High
Court. The case of the prosecution was that in accordance with S. 139 of the
Income-tax Act, 1961 the return was not filed in time, but was filed after a
lapse of almost about 20 months. It was submitted that in both the returns the
income was not shown correctly and, therefore, the accused has committed
offences punishable u/s.276CC and u/s.277 of the Act. It was also submitted that
the Court below took a hyper-technical view of the matter and wrongly acquitted
the accused.

 

The Madhya Pradesh High Court dismissed the appeal and held
as under :

“(i) In the matter of Narayan v. UOI, (1994) 208 ITR
82, this Court has observed that if except the length of delay, there is
nothing on the record and there does not appear to be any willful default,
then the Court would not be unjustified in acquitting the accused. In the said
matter, the appellant-accused was convicted by the lower Court, but the High
Court after finding that there was no willful default acquitted the accused.
The High Court has also observed that mere failure to file the return in time
in itself would not be sufficient, but the burden is upon the Department to
prove that non-action or inaction was a willful default.

(ii) In the present case, the Court below after giving its
anxious consideration to the facts of the case has come to the conclusion that
there was no willful default on the part of the accused. It would be trite to
say that the High Court would not interfere in an acquittal simply because yet
another view is possible.”


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Income or capital receipt : S. 4 of Income-tax Act, 1961 : A.Y. 2004-05 : Assessee built temple of Goddess Adhiparasakthi : Devotees offered gifts to assessee on birthday : Gift amount not income : Not taxable.

New Page 1

Reported :

19. Income or capital
receipt : S. 4 of Income-tax Act, 1961 : A.Y. 2004-05 : Assessee built temple of
Goddess Adhiparasakthi : Devotees offered gifts to assessee on birthday : Gift
amount not income : Not taxable.

[CIT v. Gopala Naicker
Bangaru, 193 Taxman 71 (Mad.)]

As per profile submitted by
the assessee, he was born in a village. During his childhood, Goddess
Adhiparasakthi frequented his dreams to make it known that she wanted a temple
to be built to alleviate the sufferings of humanity and, accordingly, the
assessee had built a temple which was also known as ‘Sakthi peedam’. Out of
love, and affection and veneration, the devotees of the temple used to assemble
in great numbers on the eve of the assessee’s birthday and offer gifts. The
amounts of gifts so received by the assessee were shown as capital receipts in
his balance sheet. The Assessing Officer treated the gifts as having
nexus to his profession as a religious head and assessed the amount as income.
The Tribunal deleted the addition.

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

“(i) In the instant case,
the assessee, as a religious head, was not involving himself in any profession
or vocation and also not performing any religious rituals/poojas for his
devotees for some consideration or the other. In fact, he was doing charitable
and spiritual work and made his devotees to follow the same for the benefit of
the mankind.



(ii) The devotees out of natural love,
affection and veneration used to assemble in large numbers on the birthdays of
the assessee and voluntarily made gifts, and by any stretch of imagination, it
could not be said that the amounts received by the assessee by way of gifts
would amount to vocation or profession. It was not the case of the Department
that the devotees were compelled to make gifts on the occasion of the
assessee’s birthday. The amounts/gifts received by the assessee could not be
said to have any direct nexus with any of his activities as a religious
person/head.

(iii) Moreover, in the
assessee’s own case in the A.Y. 1988-89, the Department had accepted the
position that gifts received by him on birthdays and other occasions were not
taxable. Since, there was no change in facts and law in the instant case, the
reasons assigned by the Tribunal were correct and there was no infirmity or
error apparent on the face of record in the impugned order.”


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Educational institution : Exemption u/s. 10(23C(vi) of Income-tax Act, 1961 : A.Ys. 2000-01 to 2007-08 : Tests to be applied similar to S. 10(22) : Generation of surplus not a bar : Surplus to be applied to the educational objects of assessee : No distinc

New Page 1

Reported :

18. Educational institution
: Exemption u/s. 10(23C(vi) of Income-tax Act, 1961 : A.Ys. 2000-01 to 2007-08 :
Tests to be applied similar to S. 10(22) : Generation of surplus not a bar :
Surplus to be applied to the educational objects of assessee : No distinction
between revenue expenditure and capital expenditure.

[Pinegrove International
Charitable Trust v. UOI, 327 ITR 73 (P&H)]

The assessee was running a
school. For the relevant years, the assessee was granted exemption
u/s.10(23C)(vi) of the Income-tax Act, 1961. The exemption was then withdrawn by
the Chief Commissioner on the ground that the profits were substantial and arose
year after year and stating that if substantial profits were earned in one year,
it should be the duty of the institution to lower its fees for the subsequent
year so that such profits were not intentionally generated.

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

“(i) Merely because
profits have resulted from the activity of imparting education that would not
change the character of the institution existing solely for educational
purposes.

(ii) The words ‘not for
the purposes of profit’ accompanying the words ‘existing solely for
educational purposes’ have to be read and interpreted in view of the third
proviso to S. 10(23C)(vi), which prescribes the methodology for the
utilisation and accumulation of income at the hands of the educational
institutions.

(iii) Both on principle
and precedent the capital expenditure is to be deducted from the gross income
of the educational institutions.

(iv) The interpretation of
the Chief Commissioner that there had to be a reasonable profit, only and only
then can an institution be said not to exist solely for the purposes of
profit, was totally a misconception of law.

(v) The Chief Commissioner
failed to keep in view the third proviso while wrongly holding that since
substantial profits were being earned year after year it could not be said
that the surplus was arising incidentally and, therefore, the assessee was not
entitled to exemption.

(vi) The methodology
adopted by the Chief Commissioner while computing surplus in not deducting the
capital expenditure incurred by the assessee from the gross income was
contrary to the third proviso to S. 10(23C)(vi) of the Act. Admittedly, in the
case of the assessee the application of income for the attainment and
achievement of the objects in the last three years, was more than 100%. The
assessee could not be held to be an institution existing for the purpose of
making profit so as not to be entitled to exemption in view of the provisions
of S. 10(23C)(vi) of the Act.”

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Business expenditure : Disallowance u/s.43B of Income-tax Act, 1961 : Luxury tax deferral scheme : Benefit under CBDT Circular Nos. 496 and 674 with reference to sales tax should be given for luxury tax also.

New Page 6

17. Business expenditure :
Disallowance u/s.43B of Income-tax Act, 1961 : Luxury tax deferral scheme :
Benefit under CBDT Circular Nos. 496 and 674 with reference to sales tax should
be given for luxury tax also.


[CIT v. Eastbourne Hotels
(P) Ltd., 233 CTR 86 (HP)]

The assessee had claimed
that in view of the luxury tax deferral scheme the payment of luxury tax be
deemed to be made in the year in which it fell due and accordingly requested not
to make any disallowance of luxury tax u/s.43B of the Income-tax Act, 1961. The
Assessing Officer disallowed the claim. The Tribunal allowed the assessee’s
claim.

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

“(i) The argument of the
Revenue that the CBDT Circular Nos. 496 and 674 make reference to the Sales
Tax Act only and not to luxury tax and, therefore, do not cover the luxury tax
deferral scheme is wholly without force. Deferral schemes for grant of
incentives whether under the Sales Tax Act or any other Act have the same
effect. The purpose is to encourage the industry. The Circulars issued by the
CBDT relate to the manner in which S. 43B has to be interpreted. This
interpretation has to be consistent for every tax deferral scheme and the
interpretation cannot change from Act to Act.

(ii) The CBDT has not
granted any exemptions from the provisions of S. 43B, but has held that if its
instructions are complied with then it will be deemed that the requirements of
S. 43B has been met. This will be applicable across the board to all Acts and
cannot be limited only to the Sales Tax Acts.

(iii) However, before
taking the benefit of the deferral scheme the assessee must produce before the
Assessing Officer the requisite certificates showing that it is covered under
the deferral scheme.”

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Business expenditure : S. 37(1) of Income-tax Act, 1961 : A.Y. 2004-05 : Assessee a cine artist : Expenditure relating to fans association is deductible business expenditure.

New Page 1

Reported :

16. Business expenditure :
S. 37(1) of Income-tax Act, 1961 : A.Y. 2004-05 : Assessee a cine artist :
Expenditure relating to fans association is deductible business expenditure.

[CIT v. A. Vijayakant,
234 CTR 103 (Mad.)]

The assessee is a popular
cine actor. For the A.Y. 2004-05, the assessee had claimed a deduction of
Rs.20,19,000 towards Rasigar Manrams (fans associations) expenses. The Assessing
Officer rejected the claim. The CIT(A) noticed that for the A.Ys. 2001-02 to
2003-04, 80% of the claim was allowed. The CIT(A) therefore restricted the
disallowance to 20%. The Tribunal upheld the order of the CIT(A).

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

“(i) It is a well-known
fact that popular cine artists promote their Rasigar Manrams for the purpose
of promoting their films among the public at large. For that purpose when it
is claimed that substantial amount was spent towards dress, food, etc., at the
time of release of new films as well as for regular maintenance of the Rasigar
Manram activities, it cannot be held that it was not part of their
professional activities, namely, acting in cine field.

(ii) Therefore, the
perception of the CIT(A), which found favour with the Tribunal, cannot be
faulted.

(iii) The appeal fails and
the same is dismissed.”

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Appeal to High Court : Power and duty : S. 260A of Income-tax Act, 1961 : Where a substantial question of law arises, a party should not be denied to raise that question of law at the time of final hearing on the ground that such question was not framed a

New Page 1

Reported :

15. Appeal to High Court :
Power and duty : S. 260A of Income-tax Act, 1961 : Where a substantial question
of law arises, a party should not be denied to raise that question of law at the
time of final hearing on the ground that such question was not framed at stage
of admission of appeal.

[Ankita Deposites and
Advances (P) Ltd. v. CIT, 193 Taxman 36 (HP)]

In this case, the question
before the Himachal Pradesh High Court was as to whether a party can be
permitted to raise a substantial question of law at the time of final hearing,
which has not been framed earlier.

The High Court held as under
:

“(i) A bare reading of S.
260A clearly shows that an appeal to the High Court u/s.260A can only be filed
if a substantial question of law is involved in the appeal. It is the duty of
the High Court to frame the substantial questions of law at the time of the
admission of the appeal. In terms of Ss.(4) of S. 260A, normally, the appeal
should only be heard on the question of law so formulated and the respondent
would have a right to urge that the question so framed is not a substantial
question of law or the question so framed does not arise in the appeal.

(ii) However, the proviso
to this sub-section clearly lays down that nothing in sub-section shall in any
manner impinge on the right of the Court to hear, for the reasons to be
recorded, the appeal on any other substantial question of law not framed by
it, if it is satisfied that the case involves such a question.

(iii) It is the duty of
the Court to do justice and in case a substantial question of law arises, it
would be extremely unfair not to permit the party to raise the substantial
question of law only on the ground that such substantial question of law was
not framed at the stage of admission of the appeal.”

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AOP : Share of member in AOP : S. 86 r/w S. 40(ba), of Income-tax Act, 1961 : Assessee-company member of AOP : No bar on company member from getting benefits of S. 86.

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Reported :

14. AOP : Share of member in
AOP : S. 86 r/w S. 40(ba), of Income-tax Act, 1961 : Assessee-company member of
AOP : No bar on company member from getting benefits of S. 86.

[CIT v. Ideal
Entertainment (P) Ltd., 194 Taxman 81 (Mad.)]

The assessee-company was a
member of an association of persons (AOP). The assessee claimed exemption of
interest received from AOP u/s.86 of the Income-tax Act, 1961. The Assessing
Officer disallowed the claim on the ground that the provisions of S. 86 of the
Income-tax Act, 1961 can be made applicable only to the assessee who is not a
company or co-operative society. On a consideration of S. 86 and comparing the
same with S. 40(ba) the Tribunal allowed the assessee’s claim and held that
there is no bar for the assessee to claim the benefits provided thereunder.

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

“(i) A perusal of S. 86
would clearly show that in the case where the assessee is a member of
association of persons, income-tax was not to be payable by the assessee in
respect of his share in the income of the association or body in the manner
provided u/s.67A of the Act. The exclusion provided under the Section that
other than the company or the co-operative society or a society registered
under the Societies Registration Act, 1860 would be made applicable only to
the association of persons or a body of individuals and not to the member. In
other words, if the association of persons or a body of individuals happened
to be a company or a co-operative society or a society registered under the
Societies Registration Act, 1860 then in such an eventuality the member, who
is also an assessee is not entitled to get the benefits provided u/s.86 of the
Act.

(ii) Further, a reading of
S. 40(ba) of the Act would also make it clear that the share of the assessee
under the income of association of persons shall not be taxable. Hence, a
combined reading of the abovesaid provisions would make it clear that there is
no bar for a private company like the assessee from getting the benefits of S.
86 of the Act.”

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Substantial question of law — Whether the assessee was entitled to deduction u/s.80-IA of the Act on the amount of entire eligible income without reducing the amount of export incentives from the same.

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6 Substantial question of law — Whether the assessee was
entitled to deduction u/s.80-IA of the Act on the amount of entire eligible
income without reducing the amount of export incentives from the same.


[ACIT v. Neo Sack P. Ltd., (2009) 319 ITR 124 (SC)]

The High Court dismissed the appeal on the aforesaid question
holding that it did not arise from the order of the Tribunal and therefore could
not be made a subject matter of appeal u/s.260A of the Act. On appeal, the
Supreme Court was of the view that the question raised was an important question
of law arising for interpretation of S. 80-IA of the Act. The said question was
neither answered by the Tribunal nor by the High Court. The Supreme Court
therefore granted liberty to the Department to move to the High Court and raise
the issue specifically and in case the High Court found that the answer to the
above question needed factual finding(s), it may remit the case to the Tribunal
for disposal on merits in accordance with law.

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Supreme Court — Special Leave Petition — Order passed by the High Court should be a speaking order — Matter remanded.

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5 Supreme Court — Special Leave Petition — Order passed by
the High Court should be a speaking order — Matter remanded.


[Speed Lines P. Ltd. v. CIT, (2009) 316 ITR 102 (SC)]

The High Court had dismissed an appeal filed u/s. 260A of the
Act holding that no substantial question of law arose for its consideration. On
a special leave to the Supreme Court, the order of the High Court was set aside
by the Supreme Court since the order of the High Court was a non-speaking. The
matter was remitted to the High Court for fresh consideration on merits.

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Penalty — Concealment of income — Matter remanded to the High Court since it had relied upon its earlier decision which, though approved by the Supreme Court in some other matter, was later held to not lay down the correct law by Larger Bench of the Supre

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4 Penalty — Concealment of income — Matter remanded to the
High Court since it had relied upon its earlier decision which, though approved
by the Supreme Court in some other matter, was later held to not lay down the
correct law by Larger Bench of the Supreme Court.


[CIT v. Atul Mohan Bindal, (2009) 317 ITR 1 (sc)]

Atul Mohan Bindal, the assessee, filed return of his income
for the A.Y. 2002-03, declaring his total income at Rs.1,98,50,021. In the
assessment proceedings u/s.143, a notice along with questionnaire was issued to
him by the Assessing Officer. Pursuant thereto, the assessee attended the
assessment proceedings and furnished the requisite details. During the
assessment proceedings, it transpired that the assessee worked with M/s. DHL
International(S) Pte. Ltd., Singapore, during the previous year and was paid
salary in Singapore amounting to US $ 36,680.79 equivalent to Rs. 17,81,952. The
assessee explained that an amount of US $ 8199.87 (Rs.3,98,350) was deducted as
tax from the aforesaid salary income and having paid tax on salary income earned
in Singapore, he was of the view that the said income was not liable to be
included in the total income in India. He, however, offered salary income of
Rs.17,81,952 to be included in his total income. The assessee was also found to
have received an amount of Rs. 5,00,000 from his erstwhile employer M/s.
Honey-well International (India) Pvt. Ltd. in the previous year. His explanation
was that the said amount was exempted u/s.10(10B) of the Act being retrenchment
compensation. According to the Assessing Officer, that amount could not be
exempted u/s.10(10B), as the assessee was not a workman. The assessee also
earned interest income of Rs.22,812 from Bank of India, which was not included
by him in the total income but he offered for tax the said amount. The AO,
accordingly, added Rs.17,81,952, Rs.5,00,000 and Rs. 22,812 to the income
declared by the assessee in the return and assessed the total income of the
assessee at Rs.2,21,54,785. Penalty proceeding u/s. 271(1)(c) were initiated
separately and penalty of Rs.7,75,211 was imposed.

The assessee accepted the order of assessment but challenged
the order of penalty in appeal before the Commissioner of Income-tax (Appeals).

The Commissioner of Income-tax (Appeals) allowed the appeal
and set aside the order of penalty. The Commissioner of Income-tax (Appeals)
held that the assessee has neither concealed the particulars of his income, nor
furnished any inaccurate particulars thereof.

The Tribunal upheld the order of the Commissioner of
Income-tax (Appeals).

The Delhi High Court considered the question whether the
Assessing Officer had recorded a valid satisfaction for initiating penalty
proceedings u/s.271(1)(c) of the Act. Inter alia, relying upon a decision of
that Court in CIT v. Ram Commercial Enterprises Ltd., (2000) 246 ITR 568 (Delhi)
and noticing that Ram Commercial Enterprises had been approved by the Supreme
Court in Dilip N. Shroff v. Joint CIT, (2007) 291 ITR 519 (SC) and T. Ashok Pai
v. CIT, (2007) 292 ITR 11, held that from the reading of the assessment order,
it was not discernible as to why the AO chose to initiate proceedings against
the assessee and under which part of S. 271(1)(c). The High Court, therefore,
accepted the view of the Tribunal and the Commissioner of Income-tax (Appeals)
and dismissed the appeal of the Revenue with cost of Rs.5,000.

On an appeal, the Supreme Court held that a close look at S.
271(1)(c) and Explanation 1 appended thereto would show that in the course of
any proceedings under the Act, inter alia, if the Assessing Officer is satisfied
that a person has concealed the particulars of his income or furnished
inaccurate particulars of such income, such person may be directed to pay
penalty. The quantum of penalty is prescribed in clause (iii). Explanation 1,
appended to S. 271(1) provides that if that person fails to offer an explanation
or the explanation offered by such person is found to be false or the
explanation offered by him is not substantiated and he fails to prove that such
explanation is bona fide and that all the facts relating to the same and
material to the computation of his total income have been disclosed by him, for
the purposes of S. 271(1)(c), the amount added or disallowed in computing the
total income is deemed to represent the concealed income. The penalty spoken of
in S. 271(1)(c) is neither criminal nor quasi-criminal but a civil liability;
albeit a strict liability. Such liability being civil in nature, mens rea is not
essential.

The Supreme Court further held that insofar as the present
case was concerned, as noticed above, the High Court had relied upon its earlier
decision in Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 (Delhi) which is
said to have been approved by the Supreme Court in Dilip N. Shroff (2007) 291
ITR 519. However, Dilip N. Shroff (2007) 291 ITR 519 was held to be not laying
down good law in Dharamendra Textile (2008) 306 ITR 277 (SC) and Dharmendra
Textile was explained by the Supreme Court in Rajasthan Spinning and Weaving
Mills (2009) 8 Scale 231. According to the Supreme Court the matter therefore
needed to be reconsidered by the High Court in the light of its decisions in
Dharmendra Textile (2008) 306 ITR 277 (SC) and Rajasthan Spinning and Weaving
Mills (2009) 8 Scale 231.

The Supreme Court therefore allowed the appeal and the
judgment of the High Court of Delhi was set aside. The matter was remitted back
to the High Court for fresh consideration and decision as indicated above.



Notes :

(i) The assessee had chosen not
to appear.

(ii) Also see judgment in the
case of Reliance Petroproducts Pvt. Ltd. (322 ITR 1 — SC) analysed in ‘Closements’.


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Kar Vivad Samadhan Scheme, 1998 — What is conclusive is the order passed U/ss.(1) of S. 90 of the Scheme determining the sum payable under the Scheme and the terms ‘direct tax enactment’ or ‘indirect tax enactment’ or ‘any other law for the time being in

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6. Kar Vivad Samadhan Scheme, 1998 — What is
conclusive is the order passed U/ss.(1) of S. 90 of the Scheme determining the
sum payable under the Scheme and the terms ‘direct tax enactment’ or ‘indirect
tax enactment’ or ‘any other law for the time being in force’ refer only to
those statutes under which the order had been passed. Immunity is only in
respect of institution of any proceeding for prosecution of any offence under
direct tax enactment or indirect tax enactment or from imposition of penalty
under any of such enactments.


[ Master Cables P. Ltd. v. State of Kerala and
Anr., (2008) 296 ITR 8 (SC)]

The appellant was engaged in the business of manufacture and
sale of insulated electrical cable. It was registered under the Kerala General
Sales Tax Act, 1963 (for short, ‘the Act’). Assessment proceedings in respect of
the A.Ys. 1995-96 and 1996-97 were completed relying upon or on the basis of the
books of account maintained by it. An inspection, however, was carried out in
the premises of the appellant. A certain amount of unaccounted production and
sale of goods was found. The appellant admittedly took recourse to the
provisions of the Kar Vivad Samadhan Scheme. Declaration made by it thereunder
was accepted. By an order dated January 14, 2003, the earlier assessment order
was set aside. The appellant filed an appeal before the Kerala Sales Tax
Appellate Tribunal. The matter was remitted to the Deputy Commissioner for its
re-examination. By an order dated May 20, 2003, the assessment in respect of the
A.Y. 1996-97 was set aside. The said authority directed reassessment for the
year 1995-96 by an order dated November 7, 2003. Questioning the said orders,
appeals were filed by the appellant before the Tribunal, which by reason of a
common judgment dated December 21, 2005, were dismissed. Two sales tax revisions
were filed thereagainst before the High Court, which by reason of the impugned
judgment had been dismissed. Before the Supreme Court it was contended by the
appellant that having regard to the provisions of Ss.(3) of S. 90 of the Scheme,
the term ‘any other law for the time being in force’ must be given a wide
meaning, so as to cover not only the direct tax or indirect tax envisaged
thereunder, but also the sales tax laws of the State in the light of the
provisions of clause (3) of Article 286 of the Constitution of India and
sub-clauses (c) and (d) of clause (29A) of Article 366 thereof. After
considering the provision of S. 90(3) and S. 91 of the Kar Vivad Samadhan
Scheme, the Supreme Court held that what is conclusive is the order passed U/ss.(1)
of S. 90 of the Scheme determining the sum payable under the Scheme. The terms
‘direct tax enactment’ or ‘indirect tax enactment’ or ‘any other law for the
time being in force’ refer only to those statutes under which the order had been
passed. Immunity is in respect of institution of any proceeding for prosecution
of any offence under direct tax enactment or indirect tax enactment or from
imposition of penalty under any of such enactments. The terms ‘direct tax
enactment’ and ‘indirect tax enactment’ have been defined u/s.87(h) and 87(j) of
the Scheme. Admittedly, the case of the appellant did not come within the
purview thereof. The amplitude of the provisions of the Scheme having been
extended only to the enactments made by Parliament, having regard to the
constitutional scheme contained in Article 246 of Constitution of India, the
same cannot be extended to assessment of sales tax under a State legislation.
The legislative field to enact a law relating to sales tax is within the
exclusive domain of a State Legislature in terms of entry 54, List II of the
Seventh Schedule to the Constitution of India. The Supreme Court held that once
it is found that a statutory authority had the jurisdiction to reopen a
proceeding or set aside the order of the assessing authority, only the higher
authorities can interfere therewith. Only because the appellant had taken
recourse to the Scheme, the same would not attract either Ss.(3) of S. 90 of the
Scheme or S. 91 thereof, so as to cover a subject which is within an exclusive
domain of the State Legislature. The appeal was therefore dismissed.

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Charitable purpose — Charitable Institution — Statutory body established for the predominant purpose of development of minor ports the management of which is with the State Government and where there is no profit motive covered within the meaning of the w

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5 Charitable purpose — Charitable Institution
— Statutory body established for the predominant purpose of development of minor
ports the management of which is with the State Government and where there is no
profit motive covered within the meaning of the words any other object of
general public utility in S. 2(15) of the Act and is entitled to registration
u/s.12A


[ CIT v. Gujarat Maritime Board, (2007) 295
ITR 561 (SC)]

The Gujarat Maritime Board is a statutory authority
constituted u/s.3(2) of the Gujarat Maritime Board Act, 1981. The Board was
registered as ‘local authority’ in terms of definition u/s.3(31) of the General
Clauses Act, 1897, and was availing of exemption as local authority u/s.10(20)
of the 1961 Act. By the Finance Act, 2002, an Explanation was added in S. 10(20)
of the Income-tax Act, by which ‘local authority’ was defined. It gave a
restricted meaning to the words ‘local authority’. By reason of the said
Explanation, the expression ‘local authority’ was confined to panchayats,
municipality, municipal committee, district board and cantonment board. Thus,
the Maritime Board did not come within the definition of the expression ‘local
authority’. Under the circumstances, the Gujarat Maritime Board made an
application to the Commissioner for registering it (Board) as a ‘charitable
institution’ as defined u/s.2(15) of the Income-tax Act, 1961. Accordingly, they
claimed exemption as charitable institution in respect of income derived from
their profit/business u/s.11 of the 1961 Act. This has been denied by the
Department. One of the objections raised on behalf of the Department was that
the Gujarat Maritime Board was not entitled to the benefit of S. 11 of the 1961
Act, as the said Board was not a trust under the Public Trusts Act and,
therefore, it was not entitled to claim registration u/s.12A of the 1961 Act.
The Department’s case was that the Maritime Board was a statutory authority. It
was the case of the Department that the Board was performing statutory
functions. Development of minor ports in the State of Gujarat cannot be termed
as the work undertaken for charitable purposes and in the circumstances the
Commissioner rejected the Board’s application u/s.12A of the 1961 Act. On an
appeal, after perusal of number of decisions which have interpreted the words in
S. 2(15), namely, ‘any other object of general public utility’, the Supreme
Court held that the said expression is of the widest connotation. The word
‘general’ in the said expression means pertaining to a whole class. Therefore,
advancement of any object of benefit to the public or a section of the public as
distinguished from benefit to an individual or a group of individuals would be
charitable purpose. The said expression would prima facie include all
objects which promote the welfare of the general public. It cannot be said that
a purpose would cease to be charitable even if public welfare is intended to be
served. If the primary purpose and the predominant object are to promote the
welfare of the general public, the purpose would be charitable. When an object
is to promote or protect the interest of a particular trade or industry, that
object becomes an object of public utility, but not so if it seeks to promote
the interest of those who conduct the said trade or industry. If the primary or
predominant object of an institution is charitable, any other object which might
not be charitable, but which is ancillary or incidental to the dominant purpose,
would not prevent the institution from being a valid charity. According to the
Supreme Court, the present case was squarely covered by its judgment in the case
of CIT v. Andhra Pradesh State Road Transport Corporation, (1986) 159 ITR
1 (SC), in which it has been held that since the Corporation was established for
the purpose of providing efficient transport system, having no profit motive,
through it earns income in the process, it is not liable to Income-tax. The
Supreme Court further observed that under the scheme of S. 11(1) of the 1961
Act, the source of income must be held under trust or under other legal
obligation. Applying the said test, it was clear that the Gujarat Maritime Board
was under legal obligation to apply the income which arose directly and
substantially from the business held under trust for the development of minor
ports in the State of Gujarat. Therefore, they were entitled to be registered as
‘charitable trust’ u/s.12A of the 1961 Act.

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Companies — Minimum Alternate Tax — Credit is admissible against tax payable before calculating interest u/s.234A, u/s.234B and u/s.234C. Interpretation of statutes — A form prescribed under the rules can never have any effect on the interpretation or ope

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20 Companies — Minimum Alternate Tax — Credit is admissible
against tax payable before calculating interest u/s.234A, u/s.234B and u/s.234C.
Interpretation of  statutes — A form prescribed under the rules can never have
any effect on the interpretation or operation of the parent statute.


[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.

The Supreme Court further held that it was immaterial that the relevant form prescribed under the Income-tax Rules, at the relevant time (i.e., before 1st April, 2007), provided for set-off of the MAT credit balance against the amount of tax plus interest i.e., after the computation of interest u/s.234B. This was directly contrary to a plain reading of section 115JAA(4). A form prescribed under the rules can never have any effect on the interpretation or operation of the parent statute.

Interconnect agreements — Transaction relating to technology should be examined by technical experts from the side of the Department before deciding the tax liability arising from such transaction.

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19 Interconnect agreements — Transaction relating to
technology should be examined by technical experts from the side of the
Department before deciding the tax liability arising from such transaction.


[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.

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Assessment Order passed at the dictates of higher authority is a nullity – Though the revision and reassessment were held to be not maintainable, the Supreme Court in the exercise of its jurisdiction under 142 of the Constitution of India, directed the as

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29 Assessment Order passed at the dictates of higher
authority is a nullity – Though the revision and reassessment were held to be
not maintainable, the Supreme Court in the exercise of its jurisdiction under
142 of the Constitution of India, directed the assessment to be reopened by the
Commissioner of Income Tax, Delhi.


[CIT vs Greenworld Corporation, (2009)

314 ITR 81 (SC)]

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.

Interest u/s.234B — Interest can be charged on tax calculated on book profits u/s.115JA/115JB.

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18 Interest u/s.234B — Interest can be charged on tax
calculated on book profits u/s.115JA/115JB.


[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.

Manufacture or production of article – Ship breaking activity gives rise to the production of a distinct and different article

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28 Manufacture or production of article – Ship breaking
activity gives rise to  the production of a distinct and  different article


[Vijay Ship Breaking Corporation & Ors. vs CIT, (2009) 314
ITR 309 (SC)]

The assessee firm was engaged in the business of ship
breaking at Alang port during the previous year, relevant to the assessment year
1995-96. Old and condemned ships were acquired by the assessee for demolishing.
The Assessing Officer in his order, inter alia, applying the ratio of decision
in CIT vs N.C. Budharaja & Co. [204 ITR 412 (SC), held that ship breaking would
not constitute a manufacturing activity and, therefore, disallowed the claim of
deductions u/s. 80 HH and 80-I of the Act. The Commissioner of Income Tax
(Appeals) agreed with the above view of the Assessing Officer. On appeal, the
Tribunal, relying on the decision in Ship Scrap Traders (251 ITR 806) and
Virendra & Co. vs ACIT (251 ITR 806), inter alia, held that ship breaking
results in production of articles and amounts to manufacture, and that
deductions should be allowed to the assessee under sections 80HH and 80-I of the
Act. On appeal by the revenue, the High Court, inter alia, reversed the order of
the Tribunal holding that ship breaking activity is not an activity of
manufacture or production of any article or thing for the purpose of availing of
the benefit of deductions under section 80HH and 80I of the Act.

On appeal by the assessee, the Supreme Court observed that
the impugned judgment of the Gujarat High Court proceeds on the basis that when
a ship breaking activity is undertaken, the articles which emerged from the
activity continued to be part of the ship; such parts did not constitute new
goods and, consequently, the assessee was not entitled to claim the benefits
under sections 80HH and 80-I of the 1961 Act, as there was neither production
nor manufacture of new goods by the process of ship breaking.

The Supreme Court held that the legislature has used the
words “manufacture” or “production”. Therefore, the word “production” cannot
derive its colour from the word “manufacture”. Further, even in accordance with
the dictionary meaning of the word “production” , the word “produce” is defined
as something which is brought forth or yielded either naturally or as a result
of effort and work (see Webster’s New International Dictionary). It is important
to note that the word “new” is not used in the definition of the word “produce”.
The Supreme Court also drew support from its judgment in CIT vs Sesa Goa Ltd
[2004] 271 ITR 331, which affirmed the judgment of the Bombay High Court in the
case of Ship Scrap Traders (supra). The Supreme Court held that the Tribunal, in
the present case, was right in allowing the deductions under section 80 HH and
80-I to the assessee, holding that the ship breaking activity gave rise to the
production of a distinct and different article.

Another question that arose before the Supreme Court in this
petition was whether the assessee was bound to deduct TDS under section 195(1)
of the Act, in respect of usance interest paid for the purchase of vessel for
ship breaking. The Supreme Court held that it was not required to examine this
question because after the impugned judgment which was delivered on March 20,
2003, the Income Tax Act was amended on September 18, 2003, with effect from
April 1, 1983. By reason of the said amendment, Explanation 2 was added to
section 10(15) (iv) (c). On reading Explanation 2, it was clear that usance
interest was exempt from payment of income-tax, if paid in respect of ship
breaking activity. The assessee was not bound to deduct tax at source once
Explanation 2 to section 10(15)(iv)(c) stood inserted, as TDS arises only if the
internet is assessable in India. And since internet was not assessable in India,
there was no question of TDS being deducted by the assessee.

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Business Expenditure – Allowable only on actual payment – Bank guarantee is nothing but a guarantee for payment on some happening and cannot be equated with actual payment as required under section 43B of the Act for allowance as deduction in the computat

New Page 127 Business Expenditure – Allowable only on actual payment –
Bank guarantee is nothing but a guarantee for payment on some happening and
cannot be equated with actual payment as required under section 43B of the Act
for allowance as deduction in the computation of profits – Bottling Fees is
neither cess nor tax, hence does not fall within the purview of section 43B.

[CIT vs Mc Dowell & Co. Ltd. (No.1), (2009)

314 ITR 167 (SC)]

 

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.

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Circulars — Issued by the Board — It is not open to the officers administering the law working under the Board to say that the Circulars issued by Board are not binding on them.

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 17 Circulars — Issued by the Board — It is
not open to the officers administering the law working under the Board to say
that the Circulars issued by Board are not binding on them.


[State of Kerala & Ors. v. Kurian Abraham Pvt. Ltd. & Anr.,
(2008) 303 ITR 284 (SC)]

M/s. Kurian Abraham Pvt. Ltd., the assessee, was engaged in
the business of buying rubber, processing the same and selling the processed
rubber. The assessee purchases field latex (raw material) in Kerala, but since
its processing factories were in Tamil Nadu, it transported field latex to Tamil
Nadu for processing into centrifuged latex and returned it back to Kerala.
Thereafter, the centrifuged rubber was sold by the assessee either locally in
Kerala or inter-State.

With respect to centrifuged latex sold locally, the assessee
claimed exemption from payment of tax on the purchase turnover of field latex
(raw rubber). With respect to inter-State sale of centrifuged latex, the
assessee paid the tax under KGST Act on the purchase of field latex and claimed
exemption in respect of (‘CST’) under Notification S.R.O. No. 173/93 read with
S.R.O. No.215/97. The returns filed by the assessee were accepted by the
Assessing Officer.

They were also accepted by the Department on the basis of
Circular No. 16/98, dated May 28, 1998 issued by the Board of Revenue
u/s.3(1A)(c). Under the said Circular, field and centrifuged latex were treated
as one and the same commodity in view of entry 110 of the First Schedule to the
1963 Act.

During the interregnum, in the case of Padinjarekkara
Agencies Ltd. v. Assistant Commissioner reported in (1996) 2 KLT 641, a
learned single judge of the Kerala High Court took the view that centrifuged
latex is a commercially different product from field latex.

In view of the judgment of the High Court in Padinjarekkara’s
case, notices were issued by the Department proposing to reopen KGST and CST
completed assessments.

The Department also reopened the assessments on the ground
that the assessee had taken field latex and, therefore, the assessee was liable
to sales tax on the sales turnover of centrifuged latex under entry 110(a)(ii)
on the ground that the assessee had sold centrifuged latex brought from outside
the State of Kerala.

Aggrieved by the reopening of the assessments, the
respondent-assessee moved the High Court under Article 226 of the Constitution
for quashing the orders of reassessment, inter alia, on the ground that
they were contrary to the said Circular No. 16/98 issued by the Board of Revenue
(Taxes). The writ petition filed by the assessee stood allowed. Hence, civil
appeals were filed by the Department. The Supreme Court noted that the judgment
of the Kerala High Court in Padinjarekkara’s case related to A.Ys. 1983-84 to
1986-87 during which time Entries 38 and 39 were in force, whereas the present
case was concerned with the A.Ys. 1997-98 and 1998-99 when Entry 110 was in
force. That the structure of Entries 38 and 39 which existed in the past was
materially different from the structure of Entry 110.

The Supreme Court after taking note of Entries 38 and 39
which were substituted from 1-4-1988 and also Circular No. 16/98, dated
28-5-1998 clarifying that with effect from April 1, 1988, the judgment in
Padinjarekkara Agencies’ case cannot have any application for deciding whether
centrifuged latex is a commodity commercially different from latex, the Supreme
Court held that the said Circular granted administrative relief to the business.
It was entitled to do so. Therefore, it cannot be said that the Board had acted
beyond its authority in issuing the said Circular. Whenever such binding
Circulars are issued by the Board granting administrative relief(s) business
arranges its matters relying on such Circulars. Therefore, as long as the
Circular remains in force, it is not open to the subordinate officers to contend
that the Circular is erroneous and not binding on them. The Supreme Court
further held that in the present case, completed assessments were sought to be
reopened by the Assessing Office on the ground that the said Circular No. 16/98
was not binding. Such an approach was unsustainable in the eyes of law. If the
State Government was of the view that such Circulars are illegal or that they
were ultra vires S. 3(IA), which it was not, it was open to the State to
nullify/withdraw the said Circular. The said Circular had not been withdrawn. In
the circumstance, it was not open to the officers administering the law working
under the Board of Revenue to say that the said Circular was not binding on
them.


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.”

 

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Film production — Amortisation of expenses — Amortisation loss computed under Rule 9A is not subject to provisions of S. 80 and S. 139 of the Act.[CIT v. Joseph Valakuzhy, (2008) 302 ITR 190 (SC)]

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18 Film production — Amortisation of
expenses — Amortisation loss computed under Rule 9A is not subject to provisions
of S. 80 and S. 139 of the Act.

[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.

 

The High Court held that the amortisation loss computed under
Rule 9A was not subject to the provisions of S. 80 and S. 139 of the Act.

 

On appeal, the Supreme Court held that the balance cost of
production which amortised under Rule 9A(2) and allowed as deduction for the
next year is not a business loss. Admittedly, the second film Santhwanam was not
exhibited for a period of 180 days in the previous year, and had not covered the
cost of production of the film. The assessee was therefore entitled to carry
forward the balance of the cost of production to the next following previous
year and claim deduction of the same in the year. The Supreme Court therefore
dismissed the appeals.

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Disallowance : u/s.43B : Contribution to P.F. and ESI within two to four days after grace period, before filing of return — Amount deductible.

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1 Business expenditure : Disallowance u/s. 43B of Income-tax
Act, 1961 : A.Y. 2001-02 : Contributions to Provident Fund and Employees’ State
Insurance within two to four days after grace period but before filing return :
Amount deductible.


[CIT v. Dharmendra Sharma, 297 ITR 320 (Del.)]

Dealing with the scope of S. 43B of the Income-tax Act, 1961
for the A.Y. 2001-02, the Delhi High Court held as under :

“Contributions made towards Provident Fund and Employees’
State Insurance within 2 to 4 days after the grace period, but before filing
the return are entitled to the benefit provided u/s. 43B.”


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Refund of TDS to deductor: Circular No. 285, dated 21-10-1980: A.Ys. 2002-2003 and 2003-2004: Interest payable to IDBI not accruing to it and not liable to tax: Tax paid by petitioner by way of TDS in respect of said interest is to be refunded to petition

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56 Refund of TDS to deductor: Circular No. 285, dated
21-10-1980: A.Ys. 2002-2003 and 2003-2004: Interest payable to IDBI not accruing
to it and not liable to tax: Tax paid by petitioner by way of TDS in respect of
said interest is to be refunded to petitioner.


[Pasupati Acrylon Ltd. v. CBDT, 237 CTR 138 (Del.)]

For the A.Ys. 2002-2003 and 2003-2004, the petitioner company
had deducted tax at source of Rs.40,65,917 and Rs.51,59,393, respectively, on
the interest payable to IDBI and had deposited the said amount in the Government Treasury by
way of TDS. It was then found that the interest did not accrue to IDBI and
accordingly was not liable to tax. Therefore, the petitioner applied for the
refund of the amount of TDS so deposited, but the application was rejected.

The petitioner filed a writ petition against the said
rejection order. The Delhi High Court allowed the writ petition and held as
under :

“Interest payable by the petitioner to IDBI not having
accrued to it and not liable to tax, the tax paid by the petitioner by way of
TDS in respect of the said interest is to be refunded to the petitioner in view
of Circular No. 285, dated 21-10-1980.”

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Survey: Section 133A of Income-tax Act, 1961: A.Y. 2005-06: An admission made during survey is not conclusive : It is subject to the other evidence explaining the discrepancy.

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57 Survey: Section 133A of Income-tax Act, 1961: A.Y.
2005-06: An admission made during survey is not conclusive : It is subject to
the other evidence explaining the discrepancy.


[CIT v. Dhingra Metal Works, 196 Taxman 488 (Del.)]

During the course of a survey at the business premises of the
assessee-firm, the tax officials noticed some discrepancies in stock. One of the
partners of the assessee could not explain the difference at that time and,
therefore, to get a peace of mind, certain additional income was offered for
assessment. Subsequently, the assessee submitted that the statement of the
partner about the stock was incorrect; and that the impugned discrepancy had
been reconciled as it was only a mistake. Consequently, the assessee withdrew
the offer of additional income for taxation on account of excess stock. However,
the Assessing Officer did not accept the assessee’s claim and made an addition
as per the statement recorded in the course of survey. 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) From a reading of section 133A, it is apparent that it
does not mandate that any statement recorded u/s.133A would have an
evidentiary value. For a statement to have evidentiary value, the Survey
Officer should have been authorised to administer oath and to record sworn
statement. This would also be apparent from section 132(4).

(ii) It is apparent that while section 132(4) specifically
authorises an officer to examine a person on oath, section 133A does not
permit the same.

(iii) Moreover, the word ‘may’ used in section 133A(iii)
clarifies beyond doubt that the material collected and the statement recorded
during the survey are not conclusive piece of evidence by themselves.

(iv) In any event, it is a settled law that though an
admission is extremely important piece of evidence, it cannot be said to be
conclusive and it is open to the person, who has made the admission, to show
that it is incorrect.

(v) Since in the instant case, the assessee had been able
to explain the discrepancy in the stock found during the course of survey by
production of relevant record including the excise register of its associate
company, the Assessing Officer could not have made the aforesaid addition
solely on the basis of the statement made on behalf of the assessee during the
course of survey.

(vi) In view of the aforesaid, instant appeal being bereft of merit, was to
be dismissed.”

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