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Category: Direct Taxes

Interest : Head of income : S. 28 and S. 56 of Income-tax Act, 1961 : A.Y. 1992-93 : Construction business : Development of properties : Interest on deposit of surplus money received from customers : Interest income is assessable as business income and no

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 10 Interest : Head of income : S. 28 and S. 56 of
Income-tax Act, 1961 : A.Y. 1992-93 : Construction business : Development of
properties : Interest on deposit of surplus money received from customers :
Interest income is assessable as business income and not as income from other
sources.

[CIT v. Lok Holdings, 308 ITR 356 (Bom.)]

The assesee firm was in the construction business. It
received monies from the purchasers of flat as advance. Interest received from
the deposit of the surplus amount was treated by the assessee as business
income. For the A.Y. the Assessing Officer assessed the interest income as
‘income from other sources’. On a finding that the entire interest sprang from
the business activity of the assessee and not out of any independent activity,
the Tribunal allowed the assessee’s claim and held that the interest income
was business income.

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

“The Tribunal was justified in holding that the interest
income received by the assessee was assess able as business income.”

 


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Interest : Waiver or reduction : S. 220(2A) of Income-tax Act, 1961 : A.Ys. 1993-94 to 1995-96 : Conditions need not co-exist : Those are alternatives : No reasoning given : Order refusing waiver set aside for fresh disposal.

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 11 
Interest : Waiver or reduction : S. 220(2A) of

Income-tax Act, 1961 : A.Ys. 1993-94 to 1995-96 : Conditions need not co-exist
: Those are alternatives : No reasoning given : Order refusing waiver set
aside for fresh disposal.

[M. V. Amar Shetty v. Chief CIT, 309 ITR 93 (Kar.)]

For the A.Ys. 1993-94 to 1995-96 the assessee had made an
application u/s.220(2A) of the Income-tax Act, 1961 for waiver of interest
levied u/s.220(2) of the Act. The Chief Commissioner rejected the assessee’s
request on the ground that the assessee had not fulfilled condition (iii) of
S. 220(2A). Assessee’s writ petition challenging the rejection was dismissed
by the single judge of the Karnataka High Court.

The Division Bench of the Karnataka High Court allowed the
assessee’s appeal, set aside the rejection order of the Chief Commissioner and
held as under :

“(i) S. 220(2A) of the Income-tax Act, 1961, prescribes two
grounds by reason of which a reduction or waiver of the amount of interest
paid or payable by an assessee can be sought, viz., (i) payment of such
amount has caused or would cause genuine hardship to the assessee; and (ii)
default in the payment of the amount on which interest has been paid or was
payable U/ss.(2) was due to circumstances beyond the control of the assessee.
Since the word ‘and’ is absent after clause (i) of Ss.(2A) of S. 220 and the
word ‘and’ is inserted after clause (ii) of Ss.(2A) of S. 220, the two
circumstances are mutually exclusive and it is only when a situation where
clause (ii) occurs that the condition under clause (iii) is not applicable to
a case falling under clause (i) of Ss.(2A) of S. 220. All the three conditions
laid down in subsection (2A) of S. 220 need not co-exist before interest can
be waived under the said provision.

(ii) In the order refusing relief U/ss.(2A) of S. 220,
however, while there was a passing reference to ill health of the assessee
there was no application of mind on clause (i) and clause (ii) of Ss.(2A) of
S. 220. The order merely stated that the assessee had not satisfied any of the
conditions and in particular had not co-operated with the Department in filing
of the returns, nor in the assessment proceedings/payment of tax demand,
therefore the assessee’s petition was rejected. There was no reasoning with
regard to the genuine hardship of the assessee or on the fact that the default
in the payment of the amount was due to circumstances beyond the control of
the assessee.”

The order of the Single Judge was set aside and the
authorities were directed to consider the request made by the assessee for
waiver of interest.

 


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Interest : S. 234B of Income-tax Act, 1961 : A.Ys. 1996-97 and 1997-98 : Assessee non resident compay was employed by another non-resident company : Failure by employer to deduct tax at source : Employee not liable to pay interest u/s.234B.

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9
Interest : S. 234B of Income-tax Act, 1961 : A.Ys. 1996-97 and 1997-98 :
Assessee non
resident compay was employed
by another non-resident company : Failure by employer to deduct tax at source
: Employee not liable to pay interest u/s.234B.


[CIT v. Tide Water Marine International Inc., 309
ITR 85 (Uttarakhand)]

The assessee, a non-resident foreign company, was engaged
in the business of mineral oils by another non-resident foreign company. For
the A.Ys. 199697 and 1997-98 the employer company did not deduct tax at source
u/s.195 of the Income-tax Act, 1961 on payments to the assessee. While
assessing the assessee’s income u/s.143 of the Act the Assessing Officer
charged interest u/s.234B of the Act. The Tribunal held that the interest was
not payable by the assessee.

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

“There was no illegality in the Tribunal’s order since the
assessee could not be made liable to pay the interest u/s.234B of the Act as
it was the duty of the non-resident foreign company which had engaged the
assessee to deduct the tax at source.”

 

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Interest : S. 115JA, S. 234B and S. 234C of Income-tax Act, 1961 : Assessment of company u/s.115JA : Interest u/s.234B and u/s. 234C is not leviable.

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 8. Interest : S. 115JA, S. 234B and S. 234C of
Income-tax Act, 1961 : Assessment of company
u/s.115JA : Interest u/s.234B and u/s. 234C is not leviable.

 [Snowcem India Ltd. v. Dy. CIT, 221 CTR
594 (Bom.)]

In the instant case income of the assessee
company was computed u/s.115JA of the Income-tax Act, 1961. The Assessing
Officer also levied interest u/s. 234B and u/s.234C of the Act. Levy of
interest was upheld by the Tribunal.

In appeal, the assessee raised the following
question : “Whether on the facts and in the circumstances of the case and in
law, the Tribunal was right in holding that interest u/s.234B and u/s.234C was
leviable in case of computation of income under the provisions of S. 115JA of
the Act ?”

The Bombay High Court noted that in CIT v.
Kotak Mahindra Finance Ltd., 265 ITR 119 (Bom.), the Bombay High Court has
taken a view that even in a case covered by S. 115J the provisions of S. 234B
and S. 234C are attracted and also noted that in that case the Bombay High
Court had disagreed with the judgment of the Karnataka High Court in the case
of Kwality Biscuits Ltd. v. CIT, 243 ITR 519 (Kar.) wherein it was held
that where the income is computed u/s.115J of the Act, interest u/s.234B and
u/s.234C are not attracted.

In the instant case the Bombay High Court noted
that the appeal against the said judgment of the Karnataka High Court has been
dismissed by the Supreme Court and held as under :

“(i) In the instant case we are concerned with S.

115JA under Chapter XII-B. The terminology used
in S. 115JA is the same or similar as contained in S. 115J.

(ii) The judgment of the Karnataka High Court was
taken in appeal by way of Special Leave to the Supreme Court in CIT v.
Kwality Biscuits Ltd., 284 ITR 434 (SC), and the following order was
passed :

“The appeals are dismissed.”

(iii) If the Special Leave Petition had only been
dismissed, then perhaps it would have been possible to say that there was no
merger of the judgment of the Karnataka High Court and the Supreme Court had
refused to grant Special Leave to appeal and consequently it was not an order
of affirmation. See Kunhayammed v. State of Kerala, (2000) 162 CTR (SC)
97. However, the order passed by the Supreme Court is “The Appeals are
dismissed” being Civil Appeal Nos. 1284 and 1285 of 2001. Once the Appeals are
dismissed then it can be said that the judgment of the Karnataka High Court
has been affirmed by the Supreme Court. That would not be the case in the
event only Special Leave Petitions had been dismissed, in which event it would
be said that the Supreme Court chose not to interfere with the judgment of the
Karnataka High Court. In such an event the doctrine of merger would not apply.
Once the judgment of the Karnataka High Court in Kwality Biscuits Ltd. (supra)
has been affirmed by the Supreme Court by dismissing the appeals, in our
opinion, the law binding on us would be the judgment in Quality Biscuits. (supra).

(iv) Considering the above, in our opinion, the
appeal will have to be allowed. Accordingly, the question as framed is
answered in the negative against the Revenue and in favour of the assessee.”


 

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S. 206C — State Govt. liable to collect tax at source from leaseholders and deposit it with Central Government

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II. Reported :




 


50 Collection of tax at source : S. 206C of
Income-tax Act, 1961 : Applicability to State Govt. : State Govt. comes within
the purview of ‘person’ u/s.206C(1C) and is liable to collect tax at source from
lease-holders and deposit it with the Central Govt.

[Government of Madhya Pradesh v. TRO, 217 CTR 137
(MP)]

 

The Government of Madhya Pradesh had granted various quarry
leases to private persons. The State Govt. had failed to collect tax at source
as required u/s.206C of the Income-tax Act, 1961. The IT Department raised
demand for such failure and initiated coercive steps for recovery of the demand.
The State Govt. filed writ petition challenging the action.

 

The Madhya Pradesh High Court upheld the action taken by the
Revenue and held as under :

“(i) Article 289 exempts property and income of the State
Govt. from taxation by the Union of India. In the present case, the proposed
action of the respondent Department or the Union of India is not to tax the
property or income of the State Govt. What is being taxed in this case is
income accrued by the leaseholders to whom
lease is granted by the State Govt. It is, therefore, taxing the income earned
by the leaseholders on the basis of the grant made by the State Govt.
Accordingly, the provisions of Article 289 of the Constitution of India will
not apply.

(ii) Complete reading of the provisions indicate that the
person collecting tax u/s.206C would include not only a company but also the
Central Govt. and the State Govt. and therefore, the word every ‘person’
appearing in S. 206C would include both the Central Govt. and the State Govt.
Complete reading of this Section
along with definition of ‘person’ clearly indicates that the State Govt. comes
within the purview of ‘person’ as contemplated u/s.206C(1C) and is liable to
collect tax at source from the lease-holders and deposit it with the Central
Govt.

(iii) So far as the argument with regard to the word
‘every person’ missing after the word ‘seller’ is concerned, the word ‘seller’
and ‘every person’ u/s.206C(1) and u/s.206C(1C) are used with
regard to different purpose. Mere absence of the word ‘every person’ in the
definition of ‘seller’ as contained in Explanation cl. (c) to S. 206C
cannot be construed to mean that the provisions of S. 206C do not apply to the
State Govt.”

S. 56(2)(id) — Interest on Govt. securities not maturing in previous year, then amount in P&L account is not material

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II. Reported :






 



51 Income : Accrual of : S. 56(2)(id) of
Income-tax Act, 1961 : A.Y. 1989-90 : Banking company : Interest on Government
securities not maturing in relevant previous year : Amount shown in profit and
loss account : Not material : Amount not assessable in A.Y. 1989-90.

[CIT v. Federal Bank Ltd., 301 ITR 188 (Ker.)]

 The assessee was a banking company. Interest on Government
securities was credited in its profit and loss account in the A.Y. 1989-90. The
assessee claimed that the interest was not assessable as the securities did not
mature during the previous year. The Assessing Officer rejected the claim and
assessed the interest income. The Tribunal accepted the claim and deleted the
addition.


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


“(i) After the amendment of 1988, interest on securities
was assessable as income from other sources u/s.56(2)(id) of the Income-tax
Act, 1961, unless it is chargeable to income-tax under the head ‘Profits and
gains of business or profession’. Income accrued obviously means income that
has become due or receivable by the assessee.

(ii) Since the assessee was banking company, the interest
on securities was assessable under the head ‘Profits and gains of business and
profession’. Since the securities had not matured for payment, the assessee
was obviously not entitled to interest, and the interest was really not due to
them in the previous year. Merely because the assessee had declared it as
amount receivable in the course of time, it did not mean that interest on
income had in fact accrued to the assessee. Though interest due or receivable
is assessable under the mercantile system, since the interest on securities
involved in this case was neither received, nor receivable during the previous
year, such interest could not be assessed.”

S. 12A — Non-consideration of registrration application within time fixed would result in deemed registration

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II. Reported :



 


49 Charitable Trust : Registration u/s.12A
of Income-tax Act, 1961 : Effect of non-passing of order within the time limit :
Non-consideration of the registration application within the time fixed by S.
12AA(2) would result in deemed registration.

[Society for the promotion of Education Adventure Sport &
Conservation of Environment v. CIT, 216 CTR 167 (All.)]

 

The petitioner is a society running a school. Up to A.Y.
1998-99 it was exempted u/s.10(22) of the Income-tax Act, 1961. Therefore, it
did not seek separate registration u/s.12A of the Act so as to claim exemption
u/s.11. S. 10(22) being omitted by the Finance Act, 1998, the petitioner applied
for registration u/s.12A of the Act, with retrospective effect, that is since
the inception of the petitioner society; i.e., 11-1-1993. The application
was made on 24-6-2003. No order was passed on the application within the time
period of six months as required u/s.12AA(2) of the Act. Therefore, the
petitioner filed writ petition before the Allahabad High Court contending that
the registration should be deemed to have been granted.

 

The Allahabad High Court allowed the writ petition and held
as under :

“(i) Taking the view that non-consideration of the
registration application within the time fixed by S. 12AA(2) would result in
deemed registration, may at the worst cause loss of some revenue or income-tax
payable by the individual assessee. On the other hand, taking the contrary
view and holding that not taking a decision within the time fixed by S.
12AA(2) is of no consequence would leave the assessee totally at the mercy of
the IT authorities, inasmuch as the assessee has not been provided any remedy
under the Act against non-decision.

(ii) Besides, the above view does not create any
irreversible situation, because, u/s.12AA(3), the registration can always be
cancelled by the CIT, if he is satisfied that the objects of such trust or
institution are not genuine or the activities are not being carried out in
accordance with the objects of the trust or institution. The only drawback is
that such cancellation would operate prospectively.

(iii) Moreover, this view furthers the object and purpose
of the aforesaid statutory provision. For the interpretation of a statute
‘purposive construction’ of the enactment which gives effect to the
legislative purpose/intendment, if necessary must be followed and applied.
Considering the pros and cons of the two views, by far the better
interpretation would be to hold that the effect of non-consideration of the
application for registration within the time fixed by S. 12AA(2) would be a
deemed grant of registration.

(iv) There is no good reason to make the assessee suffer
merely because the IT Department is not able to keep its officers under check
and control, so as to take timely decisions in such simple matters, such as
consideration of application for registration even within the large six months
period provided u/s.12AA(2).

(v) Accordingly, the respondents are directed, subject to
any order which may be passed u/s. 12AA(3), to treat the petitioner society as
an institution duly approved and registered u/s. 12AA and to recompute its
income by applying the provisions of S. 11. Accordingly, a formal certificate
of approval will be issued forthwith to the petitioner by respondent No. 2.”

 


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S. 163 — Assessee neither has business connection with NRI, nor any income received by NRI, then assessee not a trustee of NRI

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II. Reported :

47 Agent of non-resident : Liability in
special cases : S. 163 of Income-tax Act, 1961 : Search and seizure : Block
assessment u/s.158BD : Assessee was not having any business connection with the
non-resident Indian brother, nor any income came into existence as having been
received by the non-resident : Assessee not a trustee of non-resident :
Provisions of S. 163(1)(c) and (d) not attracted : Tribunal justified in not
treating assessee as agent of non-resident.

[CIT v. Rakesh Chander Goyal, 216 CTR 136 (P&H)]

 

In the course of search at the residential premises of the
assessee, it was found that the non-resident brother of the assessee, Shri Raj
Kumar Goyal, was maintaining some bank accounts which needed explanation.
Therefore, proceedings u/s.158BD of the Income-tax Act, 1961 were initiated in
the case of the non-resident brother. The Assessing Officer passed an order
u/s.163 of the Act, treating the assessee as an agent of the non-resident
brother. The CIT(A) set aside the order of the AO holding that neither there is
any business connection, nor the existence of income u/s.9(1) of the Act to the
non-resident Indian, which is a condition precedent for invoking sub-clause (c)
and (d) of S. 163(1) of the Act. The Tribunal upheld the decision of CIT(A).

 

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

“In view of its conclusion that the assessee was not having
any business connection with the non-resident Indian brother, nor any income
came into existence as having been received by the non-resident Indian and the
Department having also failed to prove the assessee as a trustee of the
non-resident Indian, the Tribunal was justified in not treating the assessee
as an agent of non- resident.”

 


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S. 131 and S. 143 — Assessee not allowed to cross-examine third party. Assessment order not valid

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II. Reported :



 


48 Assessment : Validity : S. 131 and S. 143
of Income-tax Act, 1961 : Statement of third party relied on by AO : Third party
retracted statement subsequently : Assessee not allowed to cross-examine third
party : Principles of natural justice violated: Assessment order not valid.

[Prakash Chand Nahta v. CIT, 301 ITR 134 (MP)]

 

The assessee was carrying on the business of trading in
silver ornaments, utensils, etc. Certain silver ornaments found in the course of
search were explained by the assessee as being purchased by the assessee from
one R. R who had initially denied the transaction in his statement, but he
subsequently retracted the statement and accepted the transaction. The assessee
had filed the correspondence made by him and R regarding the payment of the
amount. The Assessing Officer accepted all the entries recorded in the amanat
book except the entries pertaining to R. The affidavit of R and the bank
transaction made by him were ignored. On the basis of the original statement
made by R, the Assessing Officer made an addition of Rs.3,49,225. The assessee
made a prayer u/s.131 of the Act to summon R for cross-examination. The prayer
was not acceded to and the assessment order was passed. The Tribunal upheld the
assessment order observing that the statement of R was fairly communicated to
the assessee and that apart, it was not the case of the assessee that he did not
know what R had stated.

 

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

“The Assessing Officer had not summoned R in spite of the
request made u/s.131 of the Act, the evidence of R could not have been used
against the assessee and in the absence of affording a reasonable opportunity
of being heard by summoning the said witness, the assessment order was
vitiated.”

 


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S. 220(6) — Order on stay application to be passed by AO, not by subordinate

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I. Not reported :


46 Recovery : Stay during pendency of appeal
before CIT(A) : S. 220(6) of Income-tax Act, 1961 : Order on stay application
should be passed by the Assessing Officer and not by a subordinate authority :
In view of CBDT Instruction No. 96, dated 21-8-1969, in case of high pitched
assessment, i.e., where the assessed income is twice or more than
the returned income, assessee would be entitled to an absolute stay of the
demand in the normal course.


[Valvoline Cummins Ltd. v. DCIT and ors. (Del.), WP(C)
2511/2008 dated 20-5-2008]

 

For the A.Y. 2005-06, the petitioner-company had filed the
return of income computing the income of Rs.7.5 crores. The Additional
Commissioner having jurisdiction to assess the assessee-company assessed the
income at Rs.58.68 crores and raised a demand of Rs.25.01 crores. The assessee-company
preferred an appeal before the CIT(A) and made an application to the Assessing
Officer (the Additional Commissioner) for stay of the demand u/s.220(6) of the
Income-tax Act, 1961 during the pendency of the appeal before the CIT(A). The
Additional Commissioner advised the assessee to approach the Dy. Commissioner
who had concurrent jurisdiction in the matter. Accordingly, the assessee moved
an application on 8-2-2008, requesting the Dy. Commissioner to stay the demand.
When these applications for stay were pending, the assessee was served with a
notice u/s.221 of the Act, dated 14-2-2008 requiring it to show why penalty
should not be levied since the demand of tax has not been deposited by the
assessee. Therefore, the assessee moved another application to the Dy.
Commissioner on 22-2-2008, requesting to stay the demand. On 27-2-2008, the Dy.
Commissioner passed an order directing the assessee to pay 15% of the net
demand; i.e., Rs.3.75 crores on or before 3-3-2008. The assessee pointed
out that Rs.1 crore had already been paid and requested for instalment for the
balance Rs.2.75 crores. Since there was no response, apprehending coercive
action by the Department, the assessee filed a writ petition before the Delhi
High Court.

 

The Delhi High Court allowed the petition and held :

“(i) Pursuant to the order dated 16-5-2007 read with a few
subsequent letters in this connection, the Commissioner of Income-tax passed a
jurisdiction order dated 1-8-2007, whereby the Additional Commissioner was
entitled to exercise the powers and perform the function of an AO in respect
of some cases (including that of assessee). It is pursuant to these orders
that the Additional Commissioner passed an assessment order on 30-12-2007 in
the case of the assessee. The Additional Commissioner/AO does not become
functus officio immediately on passing an assessment order, he continues
to be the AO in respect of the assessee and therefore he must deal with the
application filed by the assessee u/s.220(6) of the Act.

(ii) The contention of the Revenue is that the Dy.
Commissioner has concurrent jurisdiction over the matter along with the
Additional Commissioner and, therefore, he was fully competent to dispose of
the stay petition filed by the assessee. On the issue of concurrent
jurisdiction, in the case of Berger Paints India Ltd. v. ACIT, 246 ITR
133 (Cal.) the Calcutta High Court had explained the meaning of the expression
concurrent to mean two authorities having equal powers to deal with a
situation, but the same work cannot be divided between them. It appears to us
quite clearly that there is a distinction between concurrent exercise of power
and joint exercise of power; when power has been conferred upon two
authorities concurrently, either one of them can exercise that power and once
a decision is taken to exercise the power by any one of those two authorities,
that exercise must be terminated by that authority only. It is not that one
authority can start exercising a power and the other authority having
concurrent jurisdiction can conclude the exercise of that power. This perhaps
may be permissible in a situation where both the authorities jointly exercise
power, but it certainly is not permissible where both the authorities
concurrently exercise power.

(iii) In the facts of the present case, since the
Additional Commissioner had exercised the power of an AO, he was required to
continue to exercise that power till his jurisdiction in the matter was over.
His jurisdiction in the matter was not over merely on the passing of the
assessment order, but it continued in terms of S. 220(6) of the Act in dealing
with the petition for stay. What has happened in the present case is that
after having passed the assessment order, the Additional Commissioner seems to
have washed his hands off the matter and left it to the Dy. Commissioner to
decide the stay application filed u/s.220(6) of the Act. We are of
the opinion that this was not permissible in law.

(iv) Learned counsel for the Revenue, however, sought to
justify this by referring to an order dated 21-8-2007 passed by the Additional
Commissioner, in which it is stated as follows : For the removal of doubts it
is further clarified that after completion of assessment, the remaining
functions in the cases specified in the Schedule, appended hereto, whether
legal or administrative, shall be discharged by the DCIT, Circle-17(1), New
Delhi in accordance with law. In our opinion, the above paragraph relied upon
by the counsel for the Revenue goes well beyond the power conferred upon the
Additional Commissioner, in the sense that he has virtually abdicated the
power conferred upon him by S. 220(6) of the Act. The power u/s.220(6) of the
Act being a statutory power, the Additional Commissioner could not abdicate or
relinquish it. That apart, we find that the Additional Commissioner had no
authority in law to delegate his power to the Dy. Commissioner when he was
conferred a statutory power by the CBDT. The Principle of delegates non
potest delegare would clearly apply.

(v) Under the circumstances, we are of the opinion that
learned counsel for the assessee is right in his contention that the
application filed by the assessee on 1-2-2008 was required to be dealt with
only by the Assessing Officer, which in this case was the Additional
Commissioner.

vi) Learned counsel for the Revenue submitted that by addressing further letters to the Dy. Commissioner on 8-2-2008 and 22-2-2008, the assessee had acquiesced in the jurisdiction or power of the Dy. Commissioner to deal with the application for stay filed by the assessee. We are of the opinion, and this is well settled, that mere acquiescence in the exercise of power by a person who does not have jurisdiction to exercise that power, cannot work as an estoppel against him. Consequently, the mere fact that the assessee addressed letters dated 8-2-2008 and 22-2-2008 to the Dy. Commissioner does not mean that the Dy, Commissioner had jurisdiction over the matter. The assessee could not confer jurisdiction on the Dy. Commissioner to deal with the application filed u/ s. 220(6) of the Act. Moreover, we also find that the assessee had approached the Dy. Commissioner (apparently) only on the asking of the Additional Commissioner, otherwise the fact still remains that the assessee had made its first request to the Additional Commissioner on 1-2-2008. It was only at the instance of the Ad-ditional Commissioner that the assessee had approached the Dy. Commissioner with the letters dated 8-2-2008 and 22-2-2008. Surely, this cannot be used to the disadvantage of the assessee.

vii) It may be recalled that the returned income of the assessee was Rs.7.2S crores, but the assessed income is Rs.58.68 crores, which is almost 8 times the returned income. CBDT Instruction No. 96, dated 21-8-1969 provides that where the income determined is substantially higher than the returned income, that is, twice the latter amount or more, then the collection of tax in dispute should be held in abeyance till the decision on the appeal is taken. In this case, the assessment is almost 8 times the returned income. Under the circumstances, we are of the view that the assessee would, in normal course, be entitled to an absolute stay of the demand on the basis of the above Instruction.”

TDS : Fees for technical services : Ss. 9(1)(vii) Expl. 2 and 194J of Income-tax Act, 1961 : Assessee cellular network provider : Fee for interconnection between networks not involving human interface : Services not technical services : Not liable for TDS

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Reported :

38. TDS : Fees for technical services : Ss. 9(1)(vii) Expl. 2
and 194J of Income-tax Act, 1961 : Assessee cellular network provider : Fee for
interconnection between networks not involving human interface : Services not
technical services : Not liable for TDS.

[CIT v. Bharati Cellular Ltd., 319 ITR 139 (Del.)]


The assessee, company engaged in providing cellular
telephone facilities to their subscribers, had been granted licences by the
Department of Telecommunication for operating in specific circles. For
providing interconnection, the assessee entered into agreements with MTNL/BSNL,
which were regulated by the TRAI and under the agreement the assessee had to
pay interconnection, access charges and port charges to the interconnection
providers. The Department was of the view that interconnection/port access
charges were liable for tax deduction at source in view of the provisions of
S. 194J of the Income-tax Act, 1961 and that these charges were in the nature
of fees for technical services. The Tribunal held that there was no liability
for TDS.


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


“(i) The services rendered qua interconnection/port
access did not involve any human interface and, therefore, the services
could not be regarded as ‘technical services’ as contemplated u/s.194J of
the Act. The interconnect/port access facility was only a facility to use
the gateway and the network of MTNL/other companies. MTNL or other companies
did not provide any assistance or aid or help to the assessee in managing,
operating, setting up their infrastructure and network.

(ii) No doubt, the facility of interconnection and port
access provided by MTNL/other companies was ‘technical’ in the sense that it
involved sophisticated technology. The expression ‘technical service’ was
not to be construed in the abstract and general sense but in the narrower
sense as circumscribed by the expressions ‘managing service’ and
‘consultancy service’ as appearing in Explanation 2 to S. 9(1)(vii) of the
Act. The expression ‘technical service’ would have reference to only
technical service rendered by a human. It would not include any service
provided by machines or robots.



(iii) The interconnect charges/port access charges could not be regarded
as fees for technical services.”

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Business Income: Deemed Profit: S. 41(1) of I. T. Act, 1961: A. Y. 2002-03: Write back/off of amount which had not entered P & L a/c: S. 41(1) has no application

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Reported
:

52 Business Income: Deemed Profit: S. 41(1) of I. T. Act,
1961: A. Y. 2002-03: Write back/off of amount which had not entered P & L a/c:
S. 41(1) has no application

[CIT Vs. Saden Vikas India Ltd.; 320 ITR 538(Del)]


 


The assessee had received Rs. 50 lakhs as advance from PAL
for supply of components for automobiles manufactured by the latter. After
receipt of the amount a strike took place in the plant of PAL which resulted in
the suspension of the production and all transactions. PAL requested the
assessee to subscribe the said amount of Rs. 50 lakhs in its sister concern.
Accordingly the assessee invested the sum of Rs 50 lakhs in 12% optionally
convertible debentures of the said sister concern of PAL. However, both PAL and
its sister concern ran into difficulties and the assessee did not receive any
interest from the debentures and even the prospect of recovery of the maturity
value of the debentures became uncertain. The assessee therefore decided to
write off the amount both in the debit and credit sides of the balance-sheet.
The Assessing Officer made an addition of Rs. 50 lakhs invoking the provisions
of section 41(1) of the Income-tax Act, 1961. The Commissioner (Appeals) deleted
the addition and held that the assessee was entitled to write off the amount.
The Tribunal confirmed the order of the Commissioner (Appeals).

 

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

“i) The assessee had received the sum of Rs. 50 lakhs only
on the capital account for infrastructure on behalf of PAL and it had a right
to use such capital asset for manufacture of air-conditioning systems for cars
to be produced by PAL. The undisputed fact was that the amount of Rs. 50 lakhs
written off was not allowed as deduction nor did it represent trading
liability which had gone into the computation of income for earlier years.

ii) The Tribunal noted the above facts and held that
writing off the amount would not attract the provisions of section 41(1). The
conclusion arrived at by the Tribunal was correct and justified.”


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Constitutional validity — National Tax Tribunal — Challenge not similar to the appeal relating to the constitutional validity or National Company Law Tribunal — Matter separated.

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4 Constitutional validity —
National Tax Tribunal — Challenge not similar to the appeal relating to the
constitutional validity or National Company Law Tribunal — Matter separated.


[Madras Bar Association
v. Union of India and Another, (2010) 324 ITR 166 (SC)]

In the petitions before the
Supreme Court, the constitutional validity of the National Tax Tribunal Act,
2005 (‘the Act’ for short) was challenged. In T.C. No. 150 of 2006, additionally
there was challenge to S. 46 of the Constitution (Forty-second Amendment) Act,
1976 and Article 323B of the Constitution of India. It was contended that S. 46
of the Constitution (Forty-second Amendment) Act, is ultra vires the
basic structure of the Constitution as it enables proliferation of Tribunal
system and makes serious inroads into the independence of the judiciary by
providing a parallel system of administration of justice, in which the executive
has retained extensive control over matters such as appointment, jurisdiction,
procedure, etc. It is contended that Article 323B violates the basic structure
of the Constitution as it completely takes away the jurisdiction of the High
Courts and vests it in the National Tax Tribunal, including trial of offences
and adjudication of pure questions of law, which have always been in the
exclusive domain of the judiciary.

On January 21, 2009, when
arguments in C.A. No. 3067 of 2004 and C.A. No. 3717 of 2005, which related to
the challenge to Parts IB and IC of the Companies Act, 1956 were in progress
before the Constitution Bench, it was submitted that these matters involved a
similar issue and they could be tagged and disposed of in terms of the decision
in those appeals. Therefore the Constitution Bench directed these cases to be
listed with those appeals, even though there was no order of reference in these
matters.

C.A. No. 3067 of 2004 and
C.A. No. 3717 of 2005 were subsequently heard at length and were reserved for
judgment. The matters which were tagged were also reserved for judgment.

While disposing of C.A. No.
3067 of 2004 and C.A. No. 3717 of 2005, the Supreme Court observed that insofar
as the cases relating to the National Tax Tribunal were concerned, the T.C.
(Civil) No. 150 of 2006 involved the challenge to Article 323B of the
Constitution. The said Article enables appropriate Legislatures to provide by
law, for adjudication of trial by Tribunals of any disputes, complaints or
offences with respect to all or any of the matters specified in clause (2)
thereof. Sub-clause (i) of the clause (2) of Article 323B enables such Tribunals
to try offences against laws with respect to any of the matters specified in
clauses (a) to (h) of clause (2) of the said Article.

One of the contentions urged
in support of the challenge to Article 323B related to the fact that the
Tribunals do not follow the normal rules of evidence contained in the Evidence
Act. In criminal trials, an accused is presumed to be innocent till proved
guilty beyond reasonable doubt, and the Evidence Act plays an important role, as
appreciation of evidence and consequential finds of facts are crucial. The trial
would require experience and expertise in criminal law, which means that the
judge or the adjudicator to be legally trained. The Tribunals which follow their
own summary procedure, are not bound by the strict rules of evidence and the
members will not be legally trained. Therefore it may lead to convictions of
persons on evidence which is not sufficient in probative value or on the basis
of inadmissible evidence. It was submitted that it would thus be a retrograde
step for separation of executive from the judiciary.

The Supreme Court observed
that the appeals on issues on law are traditionally heard by the Courts. Article
323B enables the Constitution of Tribunals which will be hearing appeals on pure
questions of law which is the function of the Courts. In L. Chandra Kumar v.
Union of India (1997) 3 SCC 261 it had considered the validity of only clause
(3)(d) of Article 323B, but did not consider the validity of other provisions of
Article 323B.

The Supreme Court noted that
the appeals relating to constitutional validity of the National Company Law
Tribunal under the Companies Act, 1956 did not involve the consideration of
Article 323B. The constitutional issues raised in T.C. (Civil) No. 150 of 2006
were not touched as the power to establish company Tribunals was not traceable
to Article 323B but to several entries of Lists I and III of the Seventh
Schedule and consequently there was a challenge to this article.

The Supreme Court observed
that the basis of attack in regard to Parts IB and IC of the Companies Act and
the provisions of the NTT Act were completely different. The challenge to Parts
IB and IC of the Companies Act, 1956 sought to derive support from Article 323B
by contending that Article 323B was a bar for constitution of any Tribunal in
respect of matters not enumerated therein. On the other hand the challenge to
the NTT Act was based on the challenge to Article 323B itself.

The Supreme Court therefore
was of the view that these petitions relating to the validity of the NTT Act and
the challenge to Article 323B raised issues which did not arise in the two civil
appeals. Therefore these cases could not be disposed of in terms of the decision
in the civil appeals, but were required to be heard separately. The Supreme
Court accordingly directed that these matters be delinked and listed separately
for hearing.

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Charitable purpose : Exemption u/s.11 : Determination of the percentage of funds to be applied for the purposes of trust depreciation to be taken into account

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Reported :





47 Charitable purpose :
Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2005-06 : Determination of
the percentage of funds to be applied for the purposes of trust depreciation
allowable should be taken into account.

[CIT v. Market
Committee, Pipli, 330 ITR 16 (P&H)]

The assessee is a
charitable trust eligible for exemption u/s.11 of the Income-tax Act, 1961.
For the A.Y. 2005-06, for the purpose of ascertaining whether 85% of the
funds were applied for purposes of trust, the AO disallowed the depreciation
on the ground that since the income of the assessee was exempt u/s.11,
allowing depreciation would amount to conferring double benefit. 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 :

“The income of the
assessee being exempt, the assessee was only claiming that depreciation
should be reduced from the income for determining the percentage of funds
which had to be applied for the purposes of the trust. There was no double
deduction claimed by the assessee. It could not be held that double benefit
was given in allowing the claim for depreciation for computing income for
purposes of S. 11.”

(iv) In the instant
case, the consideration for selling 52% of the site was four flats
representing 48%. All the four flats were situated in a residential
building. Those four residential flats constituted ‘a residential house’ for
the purpose of S. 54. Profit on sale of property was used for residence. The
four residential flats could not be construed as four residential houses for
the purpose of S. 54. They had to be construed only as ‘a residential house’
and the assessee was entitled to the benefit accordingly.

(v) In that view of the
matter, the Tribunal as well as the Appellate Authority were justified in
holding that there was no liability to pay capital gain tax as the case
squarely fell u/s. 54.”



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Capital gains : Exemption u/s.54 : Joint development agreement for development of assessee’s residential property : Assessee to get 4 flats : Assessee entitled to benefit u/s.54 in respect of entire value of four flats.

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Reported :


46 Capital gains : Exemption
u/s.54 of Income-tax Act, 1961 : A.Y. 2004-05 : Joint development agreement for
development of assessee’s residential property into 8 residential units :
Assessee to get 4 flats as her share : Assessee was entitled to benefit u/s.54
in respect of entire value of four flats.

[CIT v. Smt. K. G.
Rukminiamma, 196 Taxman 87 (Kar.)]

The assessee had a
residential property on certain land. Under a joint development agreement, she
gave that property to a builder for putting up flats. The builder agreed to
construct residential apartments and agreed to deliver 48% of the super-built
area to the assessee in the form of residential apartments. The entire cost of
construction and other expenses were to be borne by the builder. Accordingly,
the builder constructed eight flats and handed over four flats to the assessee.
The assessee claimed benefit of S. 54F and, therefore, she declared capital gain
as ‘Nil’. The Assessing Officer disallowed the assessee’s claim and computed
capital gain by taking cost of construction of four flats as sale consideration
for transfer of property. The Commissioner (Appeals) held that the assessee was
entitled to deduction u/s.54 and not u/s.54F. The Tribunal dismissed the
Revenue’s appeal.

On appeal to the High Court,
the Revenue contended that u/s.54, the expression used is ‘a residential house’,
which would mean that if more than one residential house is acquired as in the
instant case, the benefit can be extended only in respect of one residential
flat.

The Karnataka High Court
held as under :


“(i) A reading of S. 54
makes it very clear that the property sold is referred to as original asset
in the Section. That original asset is described as buildings or lands
appurtenant thereto and being a residential house. Therefore, it is not
merely ‘a residential house’. The residential house may include buildings or
lands appurtenant thereto. The stress is on the use to which the property is
put to. Only when that asset is used as a residential house, which may
consist of buildings or lands appurtenant thereto, the income derived from
the sale of such a residential house is chargeable under the head ‘income
from house property.’

(ii) If the assessee
has, within a period of one year before or two years after the date on which
the transfer took place, purchased or has within a period of three years
after that date, constructed a residential house, then instead of the
capital gain being charged to income-tax as income of the previous year in
which the transfer took place, it shall be dealt with in accordance with the
aforesaid provisions. In this part of the Section also, the expression ‘a
residential house’ is again used. The said residential house necessarily has
to include buildings or lands appurtenant thereto. It cannot be construed as
one residential house.

(iii) The context in
which the expression ‘a residential house’ is used in S. 54 makes it clear
that it was not the intention of the legislation to convey the meaning that
it refers to a single residential house. If that was the intention, they
would have used the word ‘one’. As in the earlier part, the words used are
buildings or lands which are plural in number and that is referred to as ‘a
residential house’, the original asset, an asset newly acquired after the
sale of the original asset also can be buildings or lands appurtenant
thereto, which also should be ‘a residential house’. Therefore, the letter
‘a’ in the context it is used should not be construed as meaning ‘singular’.
But, being an indefinite article, the said expression should be read in
consonance with the other words ‘buildings’ and ‘lands’ and, therefore, the
singular ‘a residential house’ also permits use of plural by virtue of S.
13(2) of the General Clauses Act.

(iv) In the instant
case, the consideration for selling 52% of the site was four flats
representing 48%. All the four flats were situated in a residential
building. Those four residential flats constituted ‘a residential house’ for
the purpose of S. 54. Profit on sale of property was used for residence. The
four residential flats could not be construed as four residential houses for
the purpose of S. 54. They had to be construed only as ‘a residential house’
and the assessee was entitled to the benefit accordingly.

(v) In that view of the
matter, the Tribunal as well as the Appellate Authority were justified in
holding that there was no liability to pay capital gain tax as the case
squarely fell u/s. 54.”



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Business income : Benefit or perquisite S. 28(iv) has no application to any transaction involving money : Loan obtained from bank : Paid part of principal : One-time settlement : Bank waived principal amount and interest : S. 28(iv) not applicable : Waive

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Reported :

45 Business income : Benefit
or perquisite from business or profession : S. 28(iv) of Income-tax Act, 1961 :
A.Y. 2001-02 : S. 28(iv) has no application to any transaction involving money :
Assessee had obtained a bank loan for acquiring capital assets : Paid part of
principal amount : One-time settlement : Bank waived outstanding due of
principal amount and interest : Transaction being a loan transaction, S. 28(iv)
would not apply : Amount of waiver could not be termed as income u/s.2(24).

[Iskraemeco Regent Ltd.
v. CIT, 196 Taxman 103 (Mad.)]

The assessee was engaged in
the business of development, manufacturing and marketing of electro-mechanical
and static energy meters. It had taken a loan from the bank for purchase of
capital assets. In view of loss suffered, the assessee went before the BIFR. In
terms of the scheme of rehabilitation sanctioned by the BIFR, a one-time
settlement was arrived at between the assessee and the bank, under which the
bank waived the outstanding due of principal amount and interest. The assessee
credited the waiver of principal amount to the ‘capital reserve account’ in the
balance sheet treating it as capital in nature. The Assessing Officer treated
the said amount as ‘income’ u/s.28(iv), read with S. 2(24). The Tribunal upheld
the addition.


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


(i) S. 28(iv) speaks
about the benefit or perquisite received in kind. Such a benefit or
perquisite received in kind other than in cash would be an income as defined
u/s.2(24). In other words, to any transaction which involves money, S.
28(iv) has got no application.

(ii) Therefore, the
transaction in the instant case being a loan transaction having no
application with respect to S. 28(iv), the same could not be termed as an
income within the purview of S. 2(24). In other words, inasmuch as S. 28(iv)
was not applicable to the transaction on hand, it could not be termed as
income which could be made taxable as receipt.

(iii) Hence, such a
receipt which did not have any character of an income being that of a loan
could not be made exigible to tax.

(iv) Similarly, S.
41(1)(a) also could not have any application inasmuch as the said provision
would be applicable only to a trading liability. Accordingly, a loan
received for the purpose of capital asset would not constitute a trading
liability and, hence, S. 41(1) had no application.

(v) The Revenue
submitted that the facts involved in the instant case would come under the
purview of S. 28(i). The said contention could not be accepted for the
simple reason that it was not the case of the Assessing Officer as well as
the other authorities that the instant case would come under the purview of
S. 28(i).

(vi) The authorities
proceeded only on the footing that S. 28(iv) would be applicable. Further,
S. 2(24) defines ‘income’. While defining ‘profit and gains’, it refers to
the transactions involved u/s.28(iv). Therefore, inasmuch as the provision
contained u/s.28(i) having been not defined as income u/s.2(24), the same
would not partake the character of the income and, therefore, it is not
assessable to tax.

(vii) In other words,
only an income as defined u/s.2(24) can be made assessable to tax. It is a
well-established principle of law that all receipts are not income and,
therefore, liable to be taxed.

(viii) Insofar as the
reference made u/s.36(1)(iii) was concerned, said Section speaks about other
deductions. The said provision deals with the amount of interest paid in
respect of capital borrowal for the purpose of business. Therefore, it had
no relevance to the instant case.

(ix) Accordingly, the
assessee’s appeal was to be allowed by setting aside the orders passed by
the authorities below.”



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Block assessment :Proceedings u/s. 158BD initiated on the basis of statement recorded during search and not on any books of account or asset : Proceedings u/s.158BD not legal.

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Reported :


43 Block assessment :
Proceedings u/s.158BD of Income-tax Act, 1961 : Proceedings u/s. 158BD initiated
on the basis of statement recorded during search and not on any books of account
or asset : Proceedings u/s.158BD not legal.

[CIT v. Late Raj Pal
Bhatia, 237 CTR 1 (Del.)]

Search was carried out at
the premises of one C. No books of account or other documents or assets pertaining to assessee were found or seized during the search. The
Assessing Officer initiated proceedings u/s.158BD of the Income-tax Act, 1961
against the assessee on the basis of the statement of C recorded during the said
search operation. The Tribunal held that the initiation of the proceedings
u/s.158BD against the assessee was illegal.

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


“(i) In the present
case, admittedly, during the search carried out at the premises of C, no
books of accounts or other documents or other assets pertaining to the
assesses herein were found or seized. The entire foundation of the block
assessment u/s.158BD, insofar as assesses are concerned, was the statement
of C recorded during the course of search. Admittedly, statement of C is
neither ‘books of accounts’ nor ‘assets’. Statement was not the document
which was found during search. In fact this was the document which came to
be created during the search as the statement was recorded at the time of
search. Therefore, it cannot be said that the statement was ‘seized’ during
the search, and thus, would not qualify the expression ‘document’ having
been seized during the search. In such a scenario, proper course of action
was reassessment u/s.147.

(ii) The Tribunal has
deleted the addition taking a view that the very provision of S. 158BD
invoked by the Assessing Officer and initiating block assessment proceedings
itself was illegal. Therefore, no substantial question of law arises and
accordingly these appeals are dismissed in limine.”



 

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Business expenditure : Disallowance u/s. 40A(2) Assessee-company purchased goods from its subsidiary at higher rate — Assurance of huge quantity of uniform quality : Assessee and subsidiary in same tax bracket : No disallowance : Subsidiary is not a ‘rela

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Reported :


44 Business expenditure :
Disallowance u/s. 40A(2) of Income-tax Act, 1961 : A.Y. 1985-86 : Assessee-company
purchased goods from its subsidiary company at higher rate in view of assurance
of supply of huge quantity of uniform quality : Assessee and subsidiary in same
tax bracket and paid same rate of tax : No disallowance could be made u/s.40A(2)
: Subsidiary company is not a ‘related person’ u/s.40A(2)(b) : S. 40A(2) not
attracted.

[CIT v. V. S. Dempo & Co.
(P) Ltd., 196 Taxman 193 (Bom.)]

The assessee-company was
engaged in the business of extraction and export of iron ore. During the
relevant assessment year, it purchased iron ore from its subsidiary company. The
Assessing Officer held that the prevailing rates of sale/purchase of the same
grade of iron ore in the State were lower than the rate at which the assessee
had purchased the ore from its subsidiary and, therefore, the provisions of S.
40A(2) were attracted. The Assessing Officer, accordingly, made certain
disallowance. On appeal, the Commissioner (Appeals) held that the rates at which
the iron ore was purchased by the assessee from its subsidiary were determined
under a contract, under which the assessee was assured a huge quantity and
quality of ore and, therefore, the assessee was justified in paying the higher
rate than the rate at which the ore was available during the relevant time on
non-contractual basis. The Commissioner (Appeals) further held that the assessee
was a company and the seller of the goods was also a company and, therefore, the
rate of tax applicable to both of them was identical, namely, the highest rate
of tax. Therefore, by buying ore at rate higher than the market rate, there was
no reduction in the amount of tax payable. The Commissioner (Appeals),
accordingly, deleted the addition. The Tribunal confirmed the order of the
Commissioner (Appeals).

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

“(i) In a business of export, consistency of supply as well as quality of supply is important. In order to assure a consistent supply of material of the same quality, the purchaser of a commodity may pay to a seller bound under a contract a little higher than the current rate. Furthermore, in case of yearly contracts by agreeing to buy goods at a specified rate, the exporter is insulated from vagaries of any seasonal rise in the market rate. Therefore, unless the rate agreed is so very much excessive or unreasonable as to doubt the objective behind the agreement, it cannot be said that the rate, a little higher than the seasonal market rate, is unjustified or amounts to diversion of profit. In that connection, the fact that the assessee as well as its subsidiary company, which was the seller, were in the same tax bracket and paid the same rate of tax assumed importance.

(ii) Admittedly, it was not a case of tax evasion inasmuch as if the rate would have been less, the assessee’s profit would have been more, but the profits of the seller would have been less and both being taxable at the same rate, there would be no difference in the aggregate tax payable by the assessee and its subsidiary.

(iii) Further, the object of S. 40A(2) is to prevent diversion of income. An assessee, who has large income and is liable to pay tax at the highest rate prescribed under the Act, often seeks to transfer a part of his income to a related person who is not liable to pay tax at all or liable to pay tax at a rate lower than the rate at which the assessee pays the tax. In order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, S. 40A was added to the Act by an amendment made by the Finance Act, 1968.

(iv)    Clause (b) of S. 40A(2) gives the list of related persons. It is only where the payment is made by the assessee to the related persons mentioned in clause (b) of S. 40A(2), that the Assessing Officer gets jurisdiction to disallow the expenditure or a part of the expenditure which he considers excessive or unreasonable. The Revenue submitted that the instant case fell under sub-clause (ii) or sub-clause (iv) of clause (b) of S. 40A(2). Sub-clause (ii) provides that where the assessee is a company, firm, AOP or HUF, any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member would be a related person. In the instant case, the assessee was a company and the seller was its subsidiary company. The seller, i.e., the subsidiary company did not fall in any of the categories mentioned under sub-clause (ii) of clause (b). Only a director of the company, partner of the firm, or member of the association or family or any relative of such director, partner or member is a related person under sub-clause (ii) of clause (b) of Ss.(2). Another company, even if it is a subsidiary of the assessee, is not a related person within the meaning of sub-clause (ii) of clause (b) of

S. 40A(2). Sub-clause (iv) of clause (b) of S. 40A(2) provides that in case of a company, firm, AOP or HUF having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member is a related person. Again a subsidiary company does not fall in any of the class of persons mentioned in sub-clause (iv) of clause (b) of S. 40A(2). In law, a holding company is a member of subsidiary company and holds more than 50 per cent equity share capital of the subsidiary company (except in cases where it controls the composition of the board of directors without holding majority of the shares). While the holding company is a member of its subsidiary company, the subsidiary company is not a member of the holding company. As the subsidiary company was not a member of the assessee, sub-clause (iv) of clause (b) of S. 40A(2) was also not attracted in the instant case.

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

Appellate Tribunal : Power u/s.254(2) : Power to recall order : No absolute prohibition : Prejudice caused to party by mistake to be seen

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Reported :

42 Appellate Tribunal :
Power u/s.254(2) of Income-tax Act, 1961 : A.Ys. 2000-01 to 2005-06 : Power to
recall order : No absolute prohibition : Prejudice caused to party by mistake to
be seen.

[Lachman Das Bhatia
Hingwala (P) Ltd. v. ACIT, 330 ITR 243 (Del.) (FB)]

Dealing with the scope of
power of the Tribunal u/s.254(2) of the Income-tax Act, 1961, in this case the
Full Bench of the Delhi High Court explained the decision of the Supreme Court
in Honda Siel Power Products Ltd. v. CIT, 295 ITR 466 (SC) and held as under :



“(i) In CIT v. Honda
Siel Power Products Ltd., 293 ITR 132 (Del.), the High Court considered the

contention that the recall of the Tribunal’s entire decision was prohibited
on the basis that in the garb of rectification, the order cannot be
recalled. The application for rectification was filed as the Tribunal had
not taken note of a binding precedent, though it was cited before the
Tribunal. In that factual background, the Supreme Court held that the power
of rectification has been conferred on the Tribunal to see that no prejudice
is caused to either of the parties appearing before it by its decision based
on a mistake apparent on record and that atonement to the wronged party by
the Court or the Tribunal for the wrong committed by it has nothing to do
with the inherent power to review. The Court took note of the fact that the
Tribunal committed a mistake in not considering material which was already
on record and the Tribunal acknowledged its mistake and accordingly
rectified its order.

(ii) The decision of the
Supreme Court in Honda Siel Power Products Ltd. v. CIT, 295 ITR 466 (SC) is
an authority for the proposition that the Tribunal in certain circumstances
can recall its own order and S. 254(2) of the Act does not totally prohibit
so. Decisions which lay down the principle that the Tribunal under no circumstances can recall its order in entirety do not lay down the correct statement of law.

(iii) The Tribunal,
while exercising the power of rectification u/s.254(2) of the Act, can
recall its order in entirety if it is satisfied that prejudice has resulted
to the party which is attributable to the Tribunal’s mistake, error or
omission and which error is a manifest error and it has nothing to do with
the doctrine or concept of inherent power of review.”



 

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Business deductions : Restriction u/s.80IA(9) applies for the total amount allowable as deduction and not for the computation.

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Unreported :

41 Business deductions :
Computation of the amount for deduction and the amount allowable as deduction :
Restriction u/s. 80IA(9) of Income-tax Act, 1961 : A.Y. 2003-04 : Restriction
u/s.80IA(9) applies for the total amount allowable as deduction and not for the
computation.

[Associated Capsules Pvt.
Ltd. v. Dy. CIT, (Bom.); ITA No. 3036 of 2010, dated 10-1-2011]

The following question was
considered by the Bombay High Court regarding the restriction u/s. 80IA(9) of
the Income-tax Act, 1961 :

“Whether the Tribunal was
justified in holding that S. 80IA(9) of the Income-tax Act, 1961 mandates that
the amount of profits allowed as deduction u/s.80IA(1) of the Act has to be
reduced from the profits of the business of the undertaking while computing
deduction under any other provisions under heading ‘C’ in Chapter VI-A of the
Income-tax Act, 1961.”

The High Court answered the
question in the negative, i.e., in favour of the assessee and held as under :


“(i) In our opinion, the
reasonable construction of S. 80IA(9) would be that where deduction is
allowed u/s.80IA(1), then the deduction computed under other provisions
under heading ‘C’ of Chapter VI-A has to be restricted to the profits of the
business that remains after excluding the profits allowed as deduction
u/s.80IA, so that the total deduction allowed under the heading ‘C’ of
Chapter VI-A does not exceed the profits of the business.

(ii) S. 80IA(9) does not
affect the computability of deduction under various provisions under heading
‘C’ of Chapter VI-A, but it affects the allowability of deductions computed
under various provisions under heading ‘C’ of Chapter VI-A, so that the
aggregate deduction u/s.80IA and other provisions under heading ‘C’ of
Chapter VI-A do not exceed 100% of the profits of the business of the
assessee.

(iii) Our above view is
also supported by the CBDT Circular No. 772, dated 23-12-1998, wherein it is
stated that S. 80IA(9) has been introduced with a view to prevent the
tax-payers from claiming repeated deductions in respect of the same amount
of eligible income and that too in excess of the eligible profits.

(iv) Thus, the object of
S. 80IA(9) being not to curtail the deductions computable under various
provisions under heading ‘C’ of Chapter, it is reasonable to hold that S.
80IA(9) affects allowability of deduction and not computation of deduction.

(v) To illustrate, if
Rs.100 is the profit of the business of the undertaking, Rs.30 is the
profits allowed as deduction u/s.80IA and the deduction computed as per S.
80HHC is Rs.80, then, in view of S. 80IA(9), the deduction u/s.80HHC would
be restricted to Rs.70, so that the aggregate deduction does not exceed the
profits of the business.”



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Transfer of case: S. 127 of I. T. Act, 1961: Before transfer, assessee should be given reasonable opportunity of hearing:

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Reported:

47 Transfer of case: S. 127 of I. T. Act, 1961: Before
transfer, assessee should be given reasonable opportunity of hearing:

Reasons must be recorded and must be part of the order of
transfer:

Deep Malhotra Vs. Chief CIT; 185 Taxman 290 (P&H):

Allowing the writ petition challenging the transfer of case
u/s. 127 of the Income-tax Act, 1961, the Punjab & Haryana High Court held as
under:

“i) The legislature has provided by Section 127(2) that
before transferring any case from one
Assessing Officer, subordinate to him, to another Assessing Officer, the
assessee is required to be given reasonable opportunity of hearing and the
reasons are to be recorded for passing such an order.

ii) The provisions of section 127(2), in substance, provide
for hearing, besides requiring an agreement between the Chief Commissioner and
Commissioner of transferring the place where the cases are to be transferred.
Further, the agreements between both the Commissioners cannot be withheld from
the assessee and a copy thereof also has to be furnished to the assessee.

iii) The argument of the Revenue that the reasons had been
recorded in a separate order would not satisfy the requirement of section 127;
because the reasons have to be part of the order and recording of separate
reasons on file without communicating the same to the assessee, has been
considered as unfair and unwarranted. Therefore, the aforesaid argument was to
be rejected.

iv) For the reasons aforementioned, the impugned order was
to be set aside.”


 


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Unexplained investment: S. 69 of I. T. Act, 1961: Assessee explained source of disputed jewellery and also offered 20% thereof to buy peace: AO rejected explanation and made full addition: Tribunal accepted the explanation but retained the offered 20%: No

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Reported:


48 Unexplained investment: S. 69 of I. T. Act, 1961:
Assessee explained source of disputed jewellery and also offered 20% thereof
to buy peace: AO rejected explanation and made full addition: Tribunal
accepted the explanation but retained the offered 20%: Not justified: No
addition can be sustained:

Sonia Magu Vs. CIT; 185 Taxman 402(Del):

In a search and seizure operation, certain  jewellery was recovered from the assessee. The assessee explained the source of the said jewellery. Notwithstanding the
explanation, she also offered 20% of the disputed jewellery and was ready to
pay tax thereupon in order to buy peace and to avoid litigation. The Assessing
Officer did not accept the explanation and the offer and accordingly added the
full value of jewellery as undisclosed income. The Commissioner (Appeals)
accepted that the assessee had satisfactorily explained the source of
purchase/acquisition of the disputed jewellery. However, he gave only partial
relief to the assessee in view of the voluntary offer of the assessee whereby
20% of the disputed jewellery amount was offered to tax and retained the
addition of the 20% amount. The Tribunal upheld the decision of the
Commissioner (Appeals) on the ground that it was the amount offered by the
assessee herself.

On appeal filed by the assessee, the Delhi High Court
allowed the assessee’s claim and held as under:

“i) The assessee maintained her stand that she had been
accounting for the entire jewellery including the source thereof.
Notwithstanding the same, only with a desire to buy peace and to avoid
litigation, she had offered 20% of the excess jewellery. That offer was,
thus, conditional. She would have paid the tax on the aforesaid amount, had
the Assessing Officer accepted the offer, thereby giving a quietus to the
matter. Instead, the Assessing Officer ignored that offer and proceeded to
deal with the matter on merits and fastened the liability of much higher
amount upon the assessee. In those circumstances, the assessee was
constrained to take up the matter in detail. She maintained her stand that
she had proper explanation for the purchase of the aforesaid jewellery. Her
stand was vindicated inasmuch as the Commissioner (Appeals) accepted her
explanation in respect of the entire jewellery. Once the assessee was able
to duly explain the source of purchase of the entire disputed jewellery, the
Commissioner (Appeals) committed an error in falling back on the conditional
offer made by the assessee before the Assessing Officer along with the
return in Form 2B.

ii) From the language of the offer made, it was clear
that it was an offer without prejudice and was not in the nature of
‘admission on the basis of which she could be fastened with the liability
which otherwise did not exceed’. Provision of section 23 of the Indian
Evidence Act would clearly be applicable to such a case. That apart, it is
trite law that the principle of estoppel has no application in the Act.

iii) The matter can be looked into from another angle as
well. Once the assessee has given a satisfactory explanation regarding the
purchase/acquisition of the disputed jewellery, the necessary consequence
would be that there was no unexplained asset in the hands of the assessee.
In such a situation, it is neither proper nor legally permissible for the
revenue to still fasten the assessee with the liability of tax. It would be
a clear ground of illegal extraction of tax from the assessee. Therefore,
the addition as an unexplained investment in jewellery was to be deleted and
the appeals were to be allowed.”


 


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Review: Appeal to High Court: S. 260A of I. T. Act, 1961: There is no power of substantive review:

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Reported:

46 Review: Appeal to High Court: S. 260A of I. T. Act, 1961:
There is no power of substantive review:

CIT Vs. West Coast Paper Mills Ltd.; 319 ITR 390 (Bom):

Dismissing the review petition filed by the Revenue against
the order in a Notice of Motion, the Bombay High Court held as under:

“i) There is distinction between substantive review and
procedural review. Substantive review must be conferred, whereas procedural
review is inherent in every court or Tribunal.

ii) Relying in the provisions of Section 260A(7) of the
Income-tax Act, 1961, it is submitted that once the provisions of the Code of
Civil Procedure pertaining to appeals is made applicable to appeal, the power
of review which is conferred by the Civil Procedure must also be so read. The
Code of Civil Procedure has distinct provisions in so far as appeals and
review are concerned. Similarly, section 96 is the provision pertaining to
first appeals. Section 100 pertains to second appeals and section 114 is a
power of review. Order 41 provides for first appeal. Order 47 provides for
review. In other words, there are distinct provisions in the Code of Civil
Procedure pertaining to appeals and review. In that context, Section 260A(7)
has to be read to mean the provisions pertaining to appeals and not provisions
pertaining to review.

iii) The power of substantive review having not been
conferred under the Income-tax Act, 1961, the review petition, as filed, was
not maintainable.”

 


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ITAT: Powers: A Y 1993-94 and 1994-95: Power to set aside and issue directions: No power to place restrictions on power of AO to determine income: Direction not to assess income at a figure less than that declared in the return or more than the figure as

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Reported:

44 ITAT: Powers: A Y 1993-94 and 1994-95: Power to set aside
and issue directions: No power to place restrictions on power of AO to determine
income: Direction not to assess income at a figure less than that declared in
the return or more than the figure as assessed u/s. 144: Direction beyond powers
of Tribunal:


CIT Vs. H. P. State Forest Corporation Ltd.; 320 ITR 54 (HP):

The assessee is a state government corporation. The accounts
of the assessee were not audited by the office of the Controller and Auditor
General. Therefore, the Assessing Officer treated the assessee’s returns for the
A Ys. 1993-94 and 1994-95 as non est and passed an assessment order u/s. 144 of
the Income-tax Act, 1961. The Tribunal set aside the assessment and directed the
assessment afresh with the audited accounts submitted by the assessee, with a
further direction that the income to be assessed was not to be at a figure less
than that declared by the assessee in its return. On a rectification application
by the assessee, the Tribunal allowed the application, but directed that the
income should not be assessed at a figure more than that assessed by the
Assessing Officer u/s. 144.

On appeal by the Revenue, the Himachal Pradesh High Court
held as under:

“i) Once the returns are treated as non est, such returns
could not be used even against the assessee.

ii) When the Tribunal was directing assessment de novo, no
fetters as to the upper or lower limit of income to be assessed could have
been placed by the Tribunal on the Assessing Officer. He had to go through the
audited accounts, apply his mind and frame the assessments afresh in
accordance with the duly audited accounts placed on record. The Tribunal’s
directions to firstly, assess the income at a figure not less than that
declared in the assessee’s returns; and, secondly, upon the rectification
application, to assess the income at a figure not higher than that assessed
u/s. 144, were unsustainable.”


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Rectification: Limitation: S. 154 of I. T. Act, 1961: Assessment order appealed against: Limitation to begin from the date of the order giving effect to the appellate order:

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Reported:

45 Rectification: Limitation: S. 154 of I. T. Act, 1961:
Assessment order appealed against: Limitation to begin from the date of the
order giving effect to the appellate order:

CIT Vs. Tony Electronics Ltd.; 185 Taxman 121 (Del):

In the case of the assessee, the assessment order was passed
u/s. 143(3) of the Income-tax Act, 1961, on 24/11/1998, making various
additions. The Commissioner (Appeals) gave partial relief to the assessee. The
matter had gone to the Commissioner (Appeals) again. Therefore, orders recording
appeal’s effects had to be passed three times. On 30/01/2006, the Assessing
Officer issued a show cause notice u/s. 154, and passed a rectification order
u/s. 154 on 26/04/2006, withdrawing certain deductions which were allowed in the
assessment order dated 24/11/1998. The Tribunal quashed the rectification order
on the ground that the same was barred by limitation.

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

“i) The legal position with which there cannot be any
quarrel, is that once an appeal against an order passed by an authority is
preferred and is decided by the appellate authority, the order of the said
authority merges with the order of the appellate authority. With this merger,
the order of the original authority ceases to exist and the order of the
appellate authority prevails with which the order of the original authority is
merged. To all intents and purposes, it is the order of the appellate
authority that would be seen.

ii) Once the doctrine of merger is understood in its true
sense as explained in a number of judgments, and relying on the interpretation
given to the word “any” or “order” given to sub-section (7) of section 154 by
the Apex Court, the inescapable conclusion would be that the original order of
assessment had ceased to operate on the decision given by the Commissioner
(Appeals), and had merged with the orders of the appellate authority. The
final order, passed by the appellate authority was dated 28/06/2004, and
acting thereupon, the Assessing Officer passed an assessment order, giving the
appeal effect thereto, on 23/07/2004. Thus, it was the order dated 28/06/2004,
passed by the Commissioner (Appeals) which remained on record to all intents
and purposes, as the original order of assessment had been merged.

iii) Once the matter was viewed from that angle, it was no
explanation that the error sought to be rectified occurred in the original
assessment order and was not the subject-matter of the appeal. Obviously, it
was an error of calculation which could not have been the subject-matter of
the appeal.

iv) The Tribunal misdirected itself in law by calculating
limitation u/s. 154(7) with reference to the date of the original order of
assessment. As a consequence, the order of the Tribunal was to be set aside
and the rectification order passed by the Assessing Officer was to be upheld
and restored.”

 


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Charitable trust: Exemption u/s. 11 of I. T. Act, 1961: A Ys. 1990-91 and 1991-92: Educational trust: Trust deed empowering trust to start educational agencies for earning income to achieve objectives of trust: Educational agencies earning income: Section

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Reported:

 

43 Charitable trust: Exemption u/s. 11 of I. T. Act, 1961: A
Ys. 1990-91 and 1991-92: Educational trust: Trust deed empowering trust to start
educational agencies for earning income to achieve objectives of trust:
Educational agencies earning income: Section 11(4A) not applicable: Trust is
entitled to exemption u/s. 11:

CIT Vs Brihdaranyak Mandal (Trust): 319 ITR 363 (All):

The assessee is a trust with the objectives to educate the
general masses about the ancient glory and cultural heritage of the country; to
acquaint them with nature and environment; to impart Vedic education; and to
work in order to spiritually uplift the masses in general, leading them to
involve in social welfare activities. The author was unable to get funds by way
of donations. Clause (4) of the trust deed empowered the trust to start
educational agencies for earning income to achieve the aims and objectives of
the trust. Thus, the author started educational agencies and raised funds. For
the A Y 1990-91, the Assessing Officer held that the trust is not valid on the
ground that the author in his individual capacity earned funds and, hence, the
provisions of section 11(4A) were applicable. The Commissioner (Appeals) held
that the trust was valid but its income could not be exempted u/s. 11 because it
was hit by sub-section (4) of section 11. For the AY 1991-92, the Assessing
Officer made a protective assessment. The Commissioner (Appeals) accepted the
trust as a valid one and that its income was from business; and, hence, the
provisions of section 11(4A) were not applicable. The Tribunal held that the
trust was valid and was entitled to exemption u/s. 11.

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

“The Revenue had not sought reference in questioning the
validity of the findings recorded by the Tribunal. The Tribunal had found that
the activities of the educational agency were carried out by the trust as clause
(4) of the trust deed empowered the trust to start educational agencies for
earning income to achieve the aims and objectives of the trust. The Tribunal had
further found that the surplus was transferred to the trust and utilized in the
purchase of land and construction of a sabha bhavan. Thus section 11(4A) was not
applicable.”

 

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Educational institution : Exemption u/s. 10(23C)(vi) of Income-tax Act, 1961 : A.Ys. 2004-05 to 2007-08 : Merely because an educational institution accumulates income, it does not go out of consideration of S. 10(23C)(vi); If accumulation of surplus is wi

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Reported :

25. Educational
institution : Exemption u/s. 10(23C)(vi) of Income-tax Act, 1961 : A.Ys. 2004-05
to 2007-08 : Merely because an educational institution accumulates income, it
does not go out of consideration of S. 10(23C)(vi); If accumulation of surplus
is within parameters of Section, it will be entitled to benefit of S.
10(23C)(vi).

[Maa Saraswati
Educational Trust v. UOI, 194 Taxman 84 (HP)]

The assessee-trust was
established for educational purpose. The Commissioner declined to grant approval
to the assessee for exemption u/s. 10(23C)(vi) of the Income-tax Act, 1961 on
the ground that it had accumulated huge income and had been generating profit.

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

“(i) The requirements for
approval u/s.10(23C)(vi) are : (1) the educational institution should exist
solely for educational purpose and not for the purpose of profit; (2) it
should not be an educational institution wholly or substantially financed by
the Government; (3) it should be an educational institution genuinely existing
for educational purpose and not for the purpose of profit; (4) its aggregate
annual income exceeds
Rs. 1 crore; and (5) it should be approved by the prescribed authority.

(ii) Under the third
proviso, it is made clear that the educational institution is entitled to
apply its income or accumulate it for application wholly or exclusively to the
objects for which it is established and in a case where more than 15% of its
income is accumulated on or after 1-4-2002, the period of the accumulation of
the amount exceeding 15% of the income shall, in no case, exceed five years.
Therefore, it is not as if the educational institution cannot generate any
surplus. Generating surplus and accumulation of income will not disqualify an
institution for the benefits of S. 10(23C).

(iii) Surplus is to be
understood in contradistinction to generation of income with the sole motive
of profit if one has to properly understand the legislative intent of S.
10(23C)(vi). Merely because an educational institution accumulates income, it
does not go out of consideration of S. 10(23C)(vi); it goes out only if
application of income is for the purposes other than education, since the
institution is to be established and maintained solely with the object of
imparting education.

(iv) In the instant case,
going by the accounts, prima facie, it appeared that there was no
question of generation of profit, though there was accumulation of surplus,
but in case the accumulation of surplus was within the parameters, the
assessee was entitled to succeed. In that context, the contention of the
assessee that there was no accumulation of income had also to be considered.”

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Capital gains : Computation : Depreciable asset : S. 50 of Income-tax Act, 1961 : Land is not a depreciable asset : S. 50 not applicable where land forms part of whole undertaking which is transferred.

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Reported :

24. Capital gains :
Computation : Depreciable asset : S. 50 of Income-tax Act, 1961 : Land is not a
depreciable asset : S. 50 not applicable where land forms part of whole
undertaking which is transferred.

[CIT v. Coimbatore Lodge,
328 ITR 69 (Mad.)]

The assessee was running a
lodge. The assessee transferred the lodge and claimed exemption u/s. 54EC of the
Income-tax Act, 1961. The Assessing Officer disallowed the claim for exemption.
The Commissioner (Alleals) and the Tribunal held that the assessee was entitled
to exemption u/s.54EC of the Act.

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

“Land is not the
depreciable asset. S. 50 of the Act deals only with the transfer of
depreciable assets. Once the land forms part of the assets of the undertaking
and the transfer is of the entire undertaking as a whole, it is not possible
to bifurcate the sale consideration in a particular asset.”


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Wealth tax : Assessment of trust/trustee : S. 21(1) of Wealth-tax Act, 1957 : A.Y. 1980-81 : Official trustee appointed by operation of statute is not covered by scope and ambit of S. 21(1)

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II. Reported :

  1. Wealth tax : Assessment of trust/trustee : S. 21(1) of
    Wealth-tax Act, 1957 : A.Y. 1980-81 : Official trustee appointed by operation
    of statute is not covered by scope and ambit of S. 21(1)

[Official Trustee, Maharashtra State v. CWT, 180
Taxman 595 (Bom.)]

Sir Jamsetjee Jejeebhoy Baronatcy Trust was reconstituted
under the Sir Jamsetjee Jejeebhoy Baronatcy Trust Act, 1915. The State of
Maharashtra amended the Sir Jamsetjee Jejeebhoy Baronatcy Trust Act, 1915 by
the Maharashtra Act No. XXVIII of 1974 and the trustees in respect of the
trust were substituted by the official trustee appointed under the Official
Trustee Act, 1913. For the A.Y. 1980-81 the official trustee filed the return
of wealth of the trust and claimed that the trustee is not assessable
u/s.21(1) of the Wealth-tax Act, 1957. The Assessing Officer rejected the
claim and the same was upheld by the Tribunal.

On reference by the official trustee, the Bombay High Court
reversed the decision of the Tribunal and held as under :

“(i) The official trustee could not be said to be a person
appointed under a trust ‘declared by a duly executed instrument in writing’.
The word ‘instrument’ does not include statute. The Wealth-tax Act does not
define the word ‘instrument’ and does not specifically include ‘statute’
within the meaning of the term. In the instant case, the official trustee was
not appointed under any rule-making power which might have amounted to
statutory instrument but under the statute itself.

(ii) Once it was held that S. 21(1), which is the main
charging section, did not apply to the assessee, it must necessarily follow
that S. 21(1A) would also not be applicable to him. In that view of the
matter, the assessment of the assessee in the instant case could not have been
effected u/s.21. In the circumstances, the order of the Tribunal was not
justified.”

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Revision : S. 263 of Income-tax Act, 1961 : A.Y. 2002-03 : Notice u/s.263 referring to four issues and final order passed referred to nine issues : Order of revision bad in law.

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II. Reported :



     



  1. Revision : S. 263 of Income-tax Act, 1961 : A.Y. 2002-03 :
    Notice u/s.263 referring to four issues and final order passed referred to
    nine issues : Order of revision bad in law.



[CIT v. Ashish Rajpal, 180 Taxman 623 (Del.)]

The assessee was a builder engaged in the business of
construction of properties. For the A.Y. 2002-03 the case of the assessee was
taken up for scrutiny and the assessment was completed u/s.143(3) of the
Income-tax Act, 1961. Subsequently the Commissioner issued notice u/s.263 on
four grounds. After hearing the assessee the Commissioner passed order
u/s.263, revised the assessment order and crystallised nine issues which,
according to him, required an enquiry and investigation. The Tribunal set
aside the order of the Commissioner.

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

“The notice dated 11-5-2006 issued by the Commissioner
before commencing the proceedings u/s.263 referred to four issues; while the
final order dated 18-19-1-2007 passed referred to nine issues; some of which
obviously did not find mention in the earlier notice and, hence, resulted in
the proceedings being vitiated as a result of the breach of the principles
of natural justice.”


 

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which had read down Rule 3.

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2 which had read down Rule
3.


[Bhel Workers Union and
Another v. Union of India and Another, (2010) 324 ITR 26 (SC)]

In the cases before the
Supreme Court, the appellants had challenged the validity of Rule 3 of the
Income-tax Rules, 1962, as amended by the Income-tax (Twenty-second Amendment)
Rules, 2001 which amended the method of computing valuation of perquisites
u/s.17(2) of the Income-tax Act, 1961. According to the appellants, the amended
Rule 3 was inconsistent with the parent Act and also ultra vires Article 14 of
the Constitution.

Writ petitions filed by the
appellants were dismissed by the High Court, aggrieved by which appeals were
filed before the Supreme Court.

The Supreme Court observed
that the amended Notification was the subject matter of appeals in the case of
Arun Kumar v. Union of India reported in (2007) 1 SCC 732. A three-Judge
Bench of the Supreme Court did not strike down Rule 3 of the Rules, but read
down the Rule to make it in line with S. 17(2)(ii) of the Act.

The Supreme Court held that
as the point involved in the present appeals had been concluded by the aforesaid
judgment, the same were disposed of in terms thereof.

The Supreme Court noted that
subsequent to the aforesaid judgment, the Legislature has added an Explanation 1
to S. 17(2) of the Act by the Finance Act, 2007, with effect from April 1, 2002,
taking away the effect of the judgment on or after April 1, 2002. According to
the appellant, however, the year 2001-02 which was also covered under Rule 3 had
not been affected by the amendment. Since, there was no challenge to the amended
provision before the Supreme Court, it declined to record any opinion on the
same and disposed of the appeals noticing the subsequent amendment brought out
by the Legislature.

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Income-tax return — Must be filed in the form prescribed by the statutory authority.

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3 Income-tax return — Must
be filed in the form prescribed by the statutory authority.

[Union of India & Others
v. I.T. Bar Association, Lucknow, (2010) 324 ITR 80 (SC)]

By the impugned order, the
High Court had permitted the assessees to file income-tax returns in Form Saral
2D instead of Form ITR-1 to ITR-8. It has been stated by the learned counsel
appearing on behalf of the respondent that this order was passed by the High
Court because of paucity of time and non-availability of adequate number of
forms. The Supreme Court held that whether the return should be filed in a
particular Form was not the business of the Court. It is for the statutory
authority to decide the same. The Supreme Court however, noted that the original
time for filing the return had been already expired, but the learned Additional
Solicitor General, appearing on behalf of the Union of India, had stated that
the time for filing the return in the prescribed Form was being extended in
relation to all categories of assessees. The Supreme Court noted this position
and set aside the impugned order with a direction that all the assessees, who
had already filed return in Form Saral 2D, pursuant to the impugned order passed
by the Allahabad High Court or any other High Court in the country, should file
return in the prescribed Form by the extended date.

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Refund — Interest on amount to be refunded would partake the character of ‘amount due’ u/s.244A.

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1 Refund — Interest on
amount to be refunded would partake the character of ‘amount due’ u/s.244A.


[CIT v. H.E.G. Ltd.,
(2010) 324 ITR 331 (SC)]

For A.Y. 1993-94, the amount
paid by the assessee towards TDS was
`45,73,528. The tax
paid after original assessment was `1,71,00,320. The total of TDS amounting to
`45,73,528 plus tax paid after original assessment of `1,71,00,320 stood at
`2,16,73,848. In other words, the total tax paid had two components, viz. TDS +
tax paid after original assessment. The assessee was entitled to the refund of
`2,16,73,848 (consisting of `1,71,00,320 and `45,73, 528 which payment was made
after 57 months and which is the only item in dispute). The assessee claimed
statutory interest for delayed refund of `45,73,528 for 57 months between April
1, 1993 and December 31, 1997 in terms of S. 244A of the Income-tax Act. The
Supreme Court held that the assessee was entitled to interest for 57 months on
`45,73,528. The principal amount of `45,73,528 has been paid on December 31,
1997, but net of interest which, as stated above, partook of the character of
‘amount due’ u/s.244A. The Supreme Court further held that the interest
component would partake of the character of the ‘amount due’ u/s. 244A.

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Income from undisclosed sources — Should be taxed in the year of receipt — Matter remanded for fresh adjudication.

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Glimpses of Supreme Court Rulings

Kishor Karia
Chartered Accountant
Atul Jasani
Advocate

8 Income from undisclosed sources — Should be taxed in the
year of receipt — Matter remanded for fresh adjudication.

[Fifth Avenue v. CIT, (2009) 319 ITR 132 (SC)]

The appellant, a registered partnership firm consisted of 15
partners. The firm was being managed by three partners by name, Irfan Razak, K.
Rahman Khan and Sadath Ali Khan. The firm constructed a commercial complex known
as ‘Fifth Avenue’ consisting of ground + three floors. The building consisted of
82 commercial shops. The building was under construction till the end of
January, 1993. Different shops were sold by the firm under different sale deeds
to several buyers. On January 5, 1993, exercising the powers u/s.132 of the
Income-tax Act, M/s. India Builders Corporation (which was also a partnership
firm) was searched. During the search, a document pertaining to the
appellant-firm was seized. Based on the documents seized during the search
conducted in the premises of one of the partners of the appellant-firm, the
proceedings were initiated. According to the Revenue, while selling different
portions of the building apart from the sale consideration shown in the sale
deeds, the firm had also received additional sale consideration by cash which
had not been accounted and the consideration shown in the sale deeds were
received by the firm through cheques. An enquiry was conducted and the Assessing
Officer held that the unaccounted income of the assessee-firm had to be brought
to tax. Accordingly, the appellant-firm was called upon to pay tax
Rs.1,52,49,240 and also ordered for separate penalty proceedings u/s.271(1)(c)
of the Act challenging the order passed by the Assessing Officer. The appellant-assessee
filed an appeal before the Commissioner of Income-tax (Appeals). The
Commissioner of Income-tax (Appeals) after hearing the parties allowed the
appeal on the ground that the document seized was not while conducting a search
on the premises of the assessee and there was nothing to show that unaccounted
money was received by the firm and that the computer printout could not be
linked with the transaction pertaining to the appellant. Therefore, the appeal
filed by the assessee was allowed by the Commissioner of Income-tax (Appeals),
against which, the Revenue took up the matter in appeal before the Tribunal,
Bangalore Bench. The Tribunal, Bangalore Bench, after examining the legality and
the correctness of the order passed by the Assessing Officer and so also the
order passed by the Commissioner of Income-tax (Appeals) came to the conclusion
that even though the document was seized from the premises of a partner of the
appellant-firm — India Builders Corporation, as the document was pertaining to
the appellant-firm and that the seizure of the document from the premises of
India Builders Corporation had not been denied by the appellant-firm,
considering the provisions of S. 3(18) of the General Clauses Act and also the
presumption attached u/s.132(4A) of the Income-tax Act, held that the partners
of the appellant-firm have received unaccounted money in cash and the same had
to be brought into assessment. According to the Tribunal, the statement of Mr.
Ziaulla Sheriff disclosed that he was a partner of 10% share and his son, Yunuz
Zia, was also a partner of 10% share and Irfan Razack was the main partner
managing the affair of the firm and that Irfan Razak was examined on February
24, 1993. In his evidence he had denied the receipt of cash on behalf of the
appellant-firm, but he had admitted the contents of the seized printout
material. Relying upon the evidence of Irfan Razak, the Tribunal came to the
conclusion that the partners of the firm accepted the contents of the printout
taken from the computer in respect of the appellant-firm from India Builders
Corporation and, therefore, came to the conclusion that the Commissioner of
Income-tax (Appeals) has committed an error in allowing the appeal. Accordingly,
the order passed by the Commissioner of Income-tax (Appeals) was set aside and
the order passed by the Assessing Officer was restored.

The Karnataka High Court in the appeal filed before it held
that even though the appellant-firm’s premises was not searched, when an
important document was seized by the authorities from the premises of the
partners of the appellant-firm, it was for the appellant to show that the
appellant or any of its partners did not receive such money by way of cash which
had not been disclosed in the return filed by the appellant. When the appellant
was contending that it had not received cash from the purchasers and that the
sale consideration shown in the sale deeds alone was paid to the appellant, the
onus was on the appellant to examine its partners to dispel such contentions.
When the appellant had admitted the seizure of the documents in question from
the premises of its partners, Ziaulla Sheriff and Yunus Zia, it was for them to
explain that this particular document was not pertaining to the partnership
concern of the appellant and it is also for them to show under that
circumstances the said document was in possession of its partners and similarly
it was for them to show the said document had nothing to do with the business
activities of the appellant. It was held that the Tribunal was justified in
reversing the finding of the Commissioner of Income-tax (Appeals).

The High Court however noted that the Tribunal while
considering the matter pertaining to penalty proceedings initiated u/s.272(1)(c)
of the Income-tax Act had remanded the matter to the Assessing Officer to
ascertain and give a finding whether the entire unaccounted money of
Rs.2,32,28,173 was received in the A.Y. 1993-94 and whether the same was
received by the partners of the appellant-firm on different dates and that the
amount so received had to be spread over based on the actual receipt of the
money in different assessment years. Relying upon the order of the Tribunal
rendered in penalty proceedings, it was contended before the High Court that
even in quantum appeal, the matter had to be reconsidered by the Assessing
Officer in order to ascertain whether the amount of Rs.2,32,28,173 was received
by the partners of the firm during the A.Y. 1993-94 or not.

The High Court observed that the search material showed that
payments were made on different dates. The High Court found that the entire
unaccounted money had been brought into tax for the A.Y. 1993-94, which in fact
was not fully correct. The High Court was therefore, of the view that the order
passed by the Assessing Officer had to be set aside and the matter had to be
remanded to the Assessing Officer to find out whether Rs.2,32,28,173 was
received by the partners of the appellant-firm during the A.Y. 1993-94 or not,
and based on such finding, the assessment had to be completed. The High Court
held that it was for the appellant and his partners to explain and produce
relevant documents before the Assessing Officer to show that when and how the
aforesaid amount of Rs.2,32,28,173 was received by them. If the partners of the
appellant-firm were unable to produce any material evidence, then it was for the
Assessing Officer to complete the assessment, treating that the amount had been
received by the partners of the appellant-firm during the A.Y. 1993-94 only. The High Court further held that in view of the assessment being set aside,
at the request of the assessee, the assessee would not raise any question of
limitation.

In an
appeal before the Supreme Court it was con-tended by the appellant that the
High Court had failed to answer the question as to whether the amount allegedly
paid by the purchasers on different dates to the managing partners of the firm
could be brought to tax in the hands of the appellant firm. The Supreme Court
found merit in the contention of the appellant, but as the other question was
remanded by the High Court to the Assessing Officer, the Supreme Court also
remanded the issue to the Assessing Officer for fresh consideration in accordance
with law.

Warehousing income : Whether business income or income from property : S. 22 and S. 28 of Income-tax Act, 1961 : A.Y. 2001-02 : Income would be business income if dominant purpose was commercial activity and it would be income from property if dominant ob

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10 Warehousing income :
Whether business income or income from property : S. 22 and S. 28 of Income-tax
Act, 1961 : A.Y. 2001-02 : Income would be business income if dominant purpose
was commercial activity and it would be income from property if dominant object
was to lease property.


[Nutan Warehousing Co. P.
Ltd. v. Dy. CIT, 326 ITR 94 (Bom.)]

The assessee-company was
carrying out warehousing activities since 1972. For the A.Y. 2001-02, the
Assessing Officer assessed the warehousing charges as income from business and
the rental income as income from house property. In appeal, the Commissioner of
Income Tax (Appeals) treated even the warehousing charges as income from house
property. The Tribunal upheld the decision of the Commissioner (Appeals).

On appeal by the assessee,
the Bombay High Court remanded the matter and held as under :

“(i) The question whether
the income received by the assessee from a transaction entered into in respect
of immovable property should be treated as income from house property or as
income from business, would have to be resolved on the basis of the
well-settled tests laid down by the law in decided cases. What is material in
such cases is the primary object of the assessee while exploiting the
property. If the primary or the dominant object is to lease or let out
property, the income derived from the property would have to be regarded as
income from house property. Conversely, if the dominant intention of the
assessee is to exploit a commercial asset by carrying on a commercial
activity, the income would have to be treated as income from business. What
has to be deduced is as to whether the letting out of the property constitutes
a dominant aspect of the transaction or whether it was subservient to the main
business of the assessee.

(ii) The terms of the
warehousing agreements were not considered by the Tribunal. Merely styling an
agreement as a warehousing agreement would not be conclusive of the nature of
the transaction since it was for the Tribunal to determine as to whether the
transaction was a bare letting out of the asset or whether the assessee was
carrying on a commercial activity involving warehousing operations.“



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Presumptive tax : Civil construction business : S. 44AD of the Income-tax Act, 1961 : A.Y. 2005-06 : Assessment of income at 8% u/s.44AD : Assessee is not under any obligation to explain individual entry of cash deposit in bank, unless such entry has no n

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8 Presumptive tax : Civil
construction business : S. 44AD of the Income-tax Act, 1961 : A.Y. 2005-06 :
Assessment of income at 8% u/s.44AD : Assessee is not under any obligation to
explain individual entry of cash deposit in bank, unless such entry has no nexus
with gross receipts.


[CIT v. Surinder Pal
Anand, 192 Taxman 264 (P&H)]

The assessee is in the
business of civil construction. For the A.Y. 2005-06, the income of the assessee
from civil construction business was computed at the presumptive rate of 8% of
the gross receipts u/s.44AD of the Income-tax Act, 1961. The AO made an addition
in respect of the cash deposited in the bank account during the year. On appeal,
the Commissioner (Appeals) held that the assessee was not required to maintain
regular books of account as the return had been filed u/s.44AD and the turnover
was below Rs.40 lakhs. It was also recorded that since the cash deposits in the
bank statement were lower than the business receipts shown by the assessee and
in the bank statement there were withdrawals as well as deposits, the addition
was unjustified. The Tribunal upheld the order of the Commissioner (Appeals).

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

“(i) Ss.(1) of S. 44AD
clearly provides that where an assessee is engaged in the business of civil
construction or supply of labour for civil construction, income shall be
estimated at 8% of the gross amount paid or payable to the assessee in the
previous year on account of such business or a sum higher than the aforesaid
sum, as may be declared by the assessee in his return of income,
notwithstanding anything to the contrary contained in S. 28 to S. 43C. This
income is to be deemed to be the profits and gains of the said business
chargeable to tax under the head ‘Profits and gains of business or
profession’. However, the said provisions are applicable where the gross
amount paid or payable does not exceed Rs.40 lakhs.

(ii) Once under the
special provision, exemption from maintenance of books of account has been
provided and presumptive tax at the rate of 8% of the gross receipt itself is
the basis for determining the taxable income, the assessee is not under any
obligation to explain individual entry of cash deposit in the bank, unless
such entry has no nexus with the gross receipts.

(iii) In the instant case,
the stand of the assessee before the Commissioner (Appeals) and the Tribunal
that the amount in question was on account of business receipts had been
accepted. The Revenue could not show with reference to any material on record
that the cash deposits were unexplained or undisclosed income of the assessee.

(iv) Therefore, no
question of law arose from the Tribunal’s order and the Revenue’s appeal was
to be dismissed.”

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Reassessment : S. 143(2), S. 147 and S. 148 of Income-tax Act, 1961 : A.Ys. 1994-95 and 1995-96 : Return filed in response to notice u/s.148 : Notice u/s.143(2) mandatory before proceeding to pass reassessment order.

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9 Reassessment : S. 143(2),
S. 147 and S. 148 of Income-tax Act, 1961 : A.Ys. 1994-95 and 1995-96 : Return
filed in response to notice u/s.148 : Notice u/s.143(2) mandatory before
proceeding to pass reassessment order.


[CIT v. Rajeev Sharma,
192 Taxman 197 (All.); 232 CTR 309 (All.)]

For the A.Y. 1994-95, the
assessee had filed original return of income on 29-3-1996. On 26-12-2000, the
Assessing Officer issued a notice u/s.148 of the Income-tax Act, 1961. In
response to the said notice, the assessee informed that he had already filed
return of income on 29-3-1996 and requested the Assessing Officer to withdraw
the said notice u/s.148. Thereafter, the Assessing Officer issued notice
u/s.143(2) and u/s.142(1) informing the assessee that notice u/s.148 was pending
and had not been withdrawn as requested by him. Thereafter, the assessee filed
return on 7-2-2002. The AO thereafter completed the assessment u/s.147 of the
Act. In appeal before the Commissioner (Appeals) the assessee contended that
since no notice was issued u/s.143(2) after filing of return in response to
notice u/s.148, reassessment was not valid. The Commissioner (Appeals) rejected
the contention holding that when the assessee had filed return in response to
notice u/s. 148, non-issuance of notice u/s.143(2) after filing return would not
be fatal. The Tribunal allowed the assessee’s appeal holding that after filing
of return in response to notice u/s.148, a notice u/s.143(2) should have been
issued being mandatory in nature.

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

“(i) The provisions
contained in S. 143(2) are mandatory and the Legislature, in its wisdom by
using the word ‘reason to believe’, has cast a duty on the Assessing Officer
to apply his mind to the material on record and after being satisfied with
regard to escaped liability, to serve notice specifying particulars of such
claim. In view of the above, after receipt of return in response to notice
u/s.148, it shall be mandatory for the Assessing Officer to serve a notice
u/s.143(2) assigning reason therein.

(ii) In the absence of any
notice issued u/s.143(2) after receipt of fresh return submitted by the
assessee in response to notice u/s.148, the entire procedure adopted for
escaped assessment shall not be valid.

(iii) In the instant case,
in response to the notice issued u/s.148, the assessee sent a letter to drop
the proceedings. Therefore, vide letter dated 18-12-2001, the Deputy
Commissioner informed that proceeding would not be dropped and gave last
opportunity to file return. Along with letter dated 18-12-2001, notices
u/s.143(2) and u/s.142(1) were also sent. In consequence thereof, the assessee
filed return on 7-2-2002. After filing of return, the Assessing Officer should
have applied his mind and after considering the material on record on ‘reason
to believe’, notice u/s. 143(2) should have been issued afresh.

(iv) Since return was
filed on 7-2-2002 in response to notice u/s.148, earlier notice dated
29-3-2001 would not be treated as valid notice for the purpose of escaped
assessment. The Legislature, in its wisdom had categorically provided that
after receipt of notice u/s.148 a fresh return may be filed and in consequence
thereof, the Assessing Officer has to apply his mind to the contents of fresh
return and then issue a notice u/s.143(2). The satisfaction, under reason to
believe, must be recorded by the Assessing Officer after applying his mind to
the contents of fresh return before issuing a notice u/s.143(2).

(v) Therefore, the appeals
were to be dismissed and the judgments of the Tribunal were to be upheld.”

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Estate duty — Valuation of goodwill — Super Profits method — There is no hard and fast rule regarding multiplier to be applied for evaluating goodwill — Value would depend on the nature of business and prevailing market conditions — Property passing on de

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10 Estate duty — Valuation of goodwill — Super Profits method
— There is no hard and fast rule regarding multiplier to be applied for
evaluating goodwill — Value would depend on the nature of business and
prevailing market conditions — Property passing on death — Claim pending
adjudication on date of death — Not a property available at the time of death.


[Controller of Estate Deputy v. Nalini V. Saraf, (2009) 319
ITR 303 (SC)]

One V. G. Saraf passed away on October 18, 1984. He was a
partner in M/s. Saraf Trading Corporation, a partnership firm carrying on
business as commission agents and exporters of tea. It exported tea to U.S.S.R.
The firm was constituted under deed of partnership dated November 27, 1963. The
firm had three partners. The deceased had fifty per cent share in profit and
loss. On September 16, 1981, the firm was reconstituted with the admission of
one more partner and a minor. The Assistant Controller of Estate Duty, inter
alia, held that for determining the value of goodwill, there were two methods of
valuation, namely, super profits method and total capitalisation method. The
Assistant Controller
preferred the super profits method. Applying the super profits method, the
Assistant Controller applied the multiplier of three years’ purchase, whereas
the assessee-respondent contended that 3X was excessive. The Assistant
Controller further held that refund of income-tax, which became due after the
demise of V. G. Saraf, constituted property of the deceased, which was also
disputed by the legal representatives of the deceased.

On the facts, the Tribunal found that at the relevant time,
the market conditions in the U.S.S.R. were not congenial; that there was huge
volatility in the tea export business even otherwise; and in the circumstances,
the Tribunal applied the multiplier of one year’s purchase instead of three
years’ purchase. This finding was upheld by the High Court.

The Supreme Court noted that in this case, the method was not
in dispute. The Supreme Court held that there was no hard and fast rule
regarding the multiplier to be applied for evaluating the goodwill of the firm.
It all depended on the nature of the business and the prevailing market
conditions. Hence, the Supreme Court was of the view that this aspect was a pure
question of fact and did not call for interference by the Supreme Court.

On the question as to whether the refund in question, which became payable
after the death, the Tribunal and the High Court concurrently held that the
refund had not become due (crystallised) on October 18, 1984, when V. G. Saraf
passed away. In fact, on that day, the claim for refund under the Act was
pending adjudication. Such refund stood determined only after the deceased.
Hence, the Supreme Court held that such refund could not be considered to be a
property available at the time of the death.

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Rectification of mistake — Whether power subsidy received by an assessee is revenue receipt or capital receipt has to be decided on the facts of each case after examining the scheme of subsidy and therefore cannot be a subject matter of rectification on t

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9 Rectification of mistake — Whether power subsidy received
by an assessee is revenue receipt or capital receipt has to be decided on the
facts of each case after examining the scheme of subsidy and therefore cannot be
a subject matter of rectification on the basis of some subsequent decision of
the Supreme Court.


[Mepco Industries Ltd. v. CIT, (2009) 319 ITR 208 (SC)]

The appellant, engaged in the business of manufacture of
potassium chlorates, had its factory in the Union Territory of Pondicherry. The
appellant received power subsidy for two years, which it initially offered as
revenue receipt in its return of income. In the petition filed u/s.264 of the
Act, the assessee pleaded that the subsidy amount was a capital receipt, hence
not liable to be taxed, and accordingly, it sought revision of the assessment
orders for the A.Ys. 1993-94 and 1994-95. In the revision petitions, the
appellant had pleaded that the subsidy amount was a capital receipt, and for
that purpose, it relied upon the judgment of the Supreme Court in the case of
CIT v. P. J. Chemicals Ltd. reported in (1994) 210 ITR 830. The revision
petitions filed by the appellant u/s.264 of the Act stood allowed by the
Commissioner of Income-tax by order dated April 30, 1997. Subsequent to the said
order, on September 19, 1997, the Supreme Court in the case of Sahney Steel and
Press Works Ltd. (1997) 228 ITR 253 held that incentive subsidy admissible to
Sahney Steel and Press Works Limited was a revenue receipt, and hence, it was
liable to taxed u/s.28 of the Act. This decision was based on a detailed
examination of the subsidy scheme formulated by the Government of Andhra
Pradesh. It stated that incentives would not be available unless and until
production had commenced. In that matter, the Supreme Court found that
incentives were given by refund of sales tax and by subsidy on power consumed
for production. In short, on the facts and circumstances of that case, the
Supreme Court had come to the conclusion that the incentives were production
incentives in the sense that the assessee was entitled to incentives only after
entering into production. It was also clarified that the scheme was not to make
any payment directly or indirectly for setting up the industries.

Following the said judgment of the Supreme Court in the case
of Sahney Steel and Press Works Ltd. (1997) 228 ITR 253, delivered on September
19, 1997, the Commissioner of Income-tax passed an order of rectification dated
March 30, 1998. The only ground on which the rectification was sought to be made
by the Commissioner of Income-tax was that power tariff subsidy given to the
appellant herein was admissible only after commencement of production.
Consequently, according to the Commissioner of Income-tax, power tariff subsidy
constituted operational subsidies, they were not capital subsidies, and in the
circumstances, applying the ratio of judgment of this Court in the case of
Sahney Steel and Press Works Ltd. (1997) 228 ITR 253, the Commissioner of
Income-tax sought to rectify its earlier order dated April 30, 1997, by invoking
S. 154 of the Act. Aggrieved by the said order, the appellant filed writ
petitions before the Madras High Court, which took the view that, in view of the
subsequent decision of this Court, in the case of Sahney Steel and Press Works
Ltd. (1997) 228 ITR 253, the Department was entitled to invoke S. 154 of the Act
and that the Commissioner was right in treating the receipt of subsidies as a
revenue receipt. This decision of the learned single Judge was affirmed by the
Division Bench of the Madras High Court.

On appeal by special leave, the Supreme Court held that on
the facts of the present case, it was of the view that the present case involved
change of opinion. The Supreme Court observed that the Government grants
different types of subsidies to the entrepreneurs. The subsidy in Sahney Steel
and Press Works Ltd. (1997) 228 ITR 253 (SC) was an incentive subsidy linked to
production. In fact, in Sahney Steel and Press Works Ltd. (1997) 228 ITR 253
(SC) (at page 257), the Court categorically stated that the scheme in hand was
an incentive scheme and it was not a scheme for setting up the industries. In
the said case, the salient features of the scheme were examined and it was
noticed that the scheme formulated by the Government of Andhra Pradesh was
admissible only after the commencement of production. The Supreme Court held
that in income-tax matters, one has to examine the nature of the item in
question, which would depend on the facts of each case. In the present case, it
was concerned with power subsidy, whereas in the case of CIT v. Ponni Sugars
and Chemicals Ltd. reported in (2008) 306 ITR 392, the subsidy given by the
Government was for repaying loans. Therefore, in each case, one has to examine
the nature of subsidy. This exercise cannot be undertaken u/s.154 of the Act.
There is one more reason why S. 154 in the present case was not invokable by the
Department. Originally, the Commissioner of Income-tax, while passing orders
u/s.264 of the Act on April 30, 1997, had taken the view that the subsidy in
question was a capital receipt not taxable under the Act. After the judgment of
the Supreme Court in Sahney Steel and Press Works Ltd. (1997) 228 ITR 253, the
Commissioner of Income-tax took the view that the subsidy in question was a
revenue receipt. Therefore, according to the Supreme Court, the case before it
was a classic illustration of change of opinion.

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Block assessment: S. 158BD of I. T. Act, 1961: Block period from 01/04/1996 to 28/10/2002: Notice for filing return: Satisfaction must be of the officer issuing notice and not of another officer: No assessment pursuant to notice: Assessee cannot be asked

New Page 1

Reported:


51 Block assessment: S. 158BD of I. T. Act, 1961: Block
period from 01/04/1996 to 28/10/2002: Notice for filing return: Satisfaction
must be of the officer issuing notice and not of another officer: No assessment
pursuant to notice: Assessee cannot be asked to file a return again: Notice
calling for return “as a company” : Status of assessee for earlier year accepted
as individual: Notice invalid.

[Subhas Chandra Bhaniramka Vs. Asst.; 320 ITR 349 (Cal)]

 

By a notice dated 18/08/2005, the Asst. Commissioner, Central
Circle called upon the petitioner to file a return of undisclosed income in the
status of a company for the block period from 01/04/1996 to 28/10/2002 u/s.
158BD(a) of the Income-tax Act, 1961. As the petitioner was assessed as an
individual, the petitioner filed the return in that status. However, the Asst.
Commissioner of the Central Circle by a letter intimated that since jurisdiction
was with the Asst. Commissioner of Circle 38, proceedings initiated u/s. 158BD
of the Act had been dropped. Thereafter, the petitioner received notice u/s.
158BD of the Act issued by the Asst. Commissioner of Circle 38 calling upon him
to file a return in the status of a company for the block period. The petitioner
requested him to furnish a certified copy of the satisfaction required for
issuing the notice u/s. 158BD. But it was not furnished.

 

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

 


“i) Under the Act “an individual” and “a company” are
separate entities. In the assessment for the assessment year 2004-05 the
Department had accepted the status of the petitioner as an individual.
However, by notice dated 31/08/2007 the petitioner was requested to file a
return “as a company”. The notice also described the petitioner “as a
company”. Since the Department had accepted the status of the petitioner as an
“individual”, and as the status of the petitioner had been incorrectly
described in the notice dated 31/08/2007, the notice was ex facie bad and
illegal.

ii) Since proceedings u/s. 158BD may have financial
implications, the satisfaction of the Assessing Officer must reveal the mental
and the dispassionate thought process of the Assessing Officer in arriving at
a conclusion and must contain reasons which should be the basis of initiating
the proceedings u/s. 158BD. Therefore, though section 158BD contains the word
“satisfy” and does not contain the words ” record his reasons” as postulated
in section 148, before proceeding, the Assessing Officer has to record his
reasons for being “satisfied”, which in the instant case was absent. There was
nothing on record to show that there was subjective and independent
satisfaction.

iii) Though the affidavit revealed that the Asst.
Commissioner of the Central Circle had recorded his satisfaction, there was
nothing to show that the Asst. Commissioner of Circle 38 had been satisfied.
He could not use the satisfaction recorded by the other officer. Therefore,
the proceeding was illegal.

iv) Since the earlier notice had not been declared invalid
by any court of law and a return was filed pursuant thereto, on which no
assessment had been made, the Asst. Commissioner of Circle 38 could not call
for another return.

v) The respondents had tried to justify the act by
supplementing reasons in their affidavit. The validity of an order has to be
judged from the order itself. The act which was not within the parameters of
section 158BD could not be validated by additional or supplementary grounds
later brought by way of affidavits.”


 

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Reassessment: Proviso to S. 147 and 148 of I. T. Act, 1961: A. Y. 2002-03: Assessment u/s. 143(3): Notice u/s. 148 beyond 4 years: Conditions not satisfied: Notice invalid:

New Page 1

Not Reported
:

50 Reassessment: Proviso to S. 147 and 148 of I. T. Act,
1961: A. Y. 2002-03: Assessment u/s. 143(3): Notice u/s. 148 beyond 4 years:
Conditions not satisfied: Notice invalid:


[Bhavesh
Developers Vs. AO (Bom); W. P. No. 2580 of 2009 dated 12/01/2010]


 

The petitioner assessee was engaged in the business of
developing and constructing buildings. The petitioner was entitled to deduction
u/s. 80-IB(10) of the Income-tax Act, 1961 and the same was granted by the
Assessing Officer. For the A. Y. 2002-03 the Assessing Officer had passed the
assessment order u/s. 143(3) of the Act on 17/01/2005 allowing deduction of Rs.
3,85,75,992/- u/s. 80-IB(10) of the Act. Subsequently, he issued a notice u/s.
148 dated 30/03/2009 for reopening the assessment. The following reasons were
recorded for reopening the assessment:

 

“On verification of case records, it is seen that the
assessee is claiming deduction u/s. 80-IB for an amount of Rs. 3,85,75,992/-.
However, as per details filed and P & L A/c. it is further observed that during
the year assessee has other income of Rs. 50,13,307/- which mainly comprises of
society deposit of Rs. 47,80,517/-, stilt parking Rs. 1,25,000/- and Sundry
Credit Balances of Rs. 1,07,712/-. Since this income does not qualify as the
income eligible for deduction u/s. 80-IB, I have reason to believe that the
income to this extent has escaped assessment and it is a fit case for issuing
notice u/s. 148 of the I. T. Act, 1961.”

 

The Bombay High Court allowed the writ petition challenging
the validity of the notice and held as under:

“i) In support of the claim for deduction u/s. 80-IB(10),
the assessee had placed certain material before the Assessing Officer. The
material that was filed with the return of income included a duly filled up
Form 10CCD. The form contained details as specified, including item 19, the
total sales of the undertaking; in item 21, the profits and gains derived by
the undertaking from the eligible business; and, in item 22, disclosed that
the deduction has been claimed under sub-section (10) of section 80-IB. The
form was certified by a Chartered Accountant. The statement of total income
and the balance sheet as on 31st March 2002 was appended to the return. The
profit and loss account for the year ending 31st March 2002 contained a
disclosure of other income in the amount of Rs. 50,13,307.16. Schedule G to
the Balance Sheet contains a break-up of the other income of Rs. 50.13 lakhs.
In addition to this disclosure, during the course of the assessment
proceedings, a letter was addressed on behalf of the assessee, by its
Chartered Accountant to the Assessing Officer. The letter inter alia contains
an explanation of the other income as reflected in the profit and loss
account. The assessee also furnished to the Assessing officer a statement of
sales and other income for each wing and for the flats comprised in the
construction as of 31st March 2002.

ii) In this background, it would be necessary to scrutinize
the basis on which a notice was issued u/s. 148 for reopening the assessment.
Ex-facie, the reasons which have been disclosed to the assessee would show
that the inference that the income has escaped assessment is based on the
disclosure made by the assessee itself. The reasons show that the finding is
based on the details filed by the assessee and from the profit and loss
accountant. Quite clearly, therefore, it was impossible for the Assessing
Officer to even draw the inference that there was a failure on the part of the
assessee to disclose fully and truly all material facts necessary for his
assessment for A. Y. 2002-03.

iii) Significantly, the reasons that have been disclosed to
the assessee do not contain a finding to the effect that there was a failure
to fully and truly disclose all necessary facts, necessary for the purpose of
assessment. In these circumstances, the condition precedent to a valid
exercise of the power to reopen the assessment, after lapse of four years from
the relevant Assessment Year, is absent in the present case.”


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S. 192 and S. 201 : Misuse of free meal coupons by employees : No presumption of misuse : Tax not deducted at source : No default.

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66 TDS : Salary: S. 192 and S. 201 of
Income-tax Act, 1961 : Misuse of free meal coupons by employees: No presumption
of misuse : Tax not deducted at source on such amount : No default.


[CIT v. Reliance Industries Ltd., 308 ITR 82 (Guj.)]

The assessee-company distributed free meal coupons to its
employees. It had entered into an agreement with A for this purpose. The
assessee-company did not deduct tax at source on the amount paid to A, on the
ground that it did not constitute perquisite. The AO held that the coupons had
been misused by some of the employees. He therefore estimated certain amount as
being taxable perquisite in the hands of the employees and passed orders
u/s.201, u/s.201(1A) and u/s.271C of the Income-tax Act, 1961 for default of
non-deduction of tax at source on such estimated amount. The Tribunal held that
the assessee had not committed any default.

 

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

“With regard to the free meal coupons the employer could not
presume that a particular percentage of employees, out of the total work force,
misused the facility so as to warrant deduction of tax at source. Furthermore,
correspondingly such tax deducted at source had to be given credit in the
assessment of the employee concerned and unless and until the tax deduction
certificate specified the employee concerned there could be no corresponding
credit given to the employee. The assessee could not be treated as being in
default in respect of such sum.”

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Business expenditure: Deduction only on actual payment: Ss. 43B and 36(1)(va) of I. T. Act, 1961: A. Y. 2002-03: Employee’s contribution to PF: Paid beyond due date under PF Act but before due date for filing return of income: Deduction allowable in the r

New Page 1

Not Reported
:

49 Business expenditure: Deduction only on actual payment:
Ss. 43B and 36(1)(va) of I. T. Act, 1961: A. Y. 2002-03: Employee’s contribution
to PF: Paid beyond due date under PF Act but before due date for filing return
of income: Deduction allowable in the relevant year:


[CIT
Vs. Animil Ltd. (Del); ITA No1063 of 2008 dated 23/12/2009]


 

In the previous year relevant to the A. Y. 2002-03 the
assessee had paid the employer’s contribution and the employees’ contribution
towards Provident Fund and ESI after the due date, as prescribed under the
relevant Act/Rules. The Assessing Officer made additions of Rs. 42,58,574/-
being employees’ contribution u/s. 36(1)(va) of the Income-tax Act, 1961 and Rs.
30,68,583/- being employer’s contribution u/s. 43B of the Act. The CIT(A)
deleted the addition and the Tribunal upheld the order of the CIT(A).

In appeal u/s. 260A of the Act, by the Revenue, the following
question was raised:

“Whether the ITAT was correct in law in deleting the
addition relating to employees’ contribution towards Provident Fund and ESI
made by the Assessing Officer u/s. 36(1)(va) of the Income-tax Act, 1961?”

 


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

“If the employees’ contribution is not deposited by the due
date prescribed under the relevant Acts and is deposited late, the employer
not only pays interest on delayed payment but can incur penalties also, for
which specific provisions are made in the Provident Fund Act as well as ESI
Act. Therefore, the Act permits the employer to make the deposit with some
delay, subject to the aforesaid consequences. In so far as the Income-tax Act
is concerned, the assessee can get the benefit if the actual payment is made
before the return is filed, as per the principles laid down by the Supreme
Court in CIT Vs. Vinay Cement Ltd., 213 CTR 268 (SC).”

 


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S. 133A : In absence of statement by client that its books of account are at premises of C.A., survey conducted in premises of C.A. and impounding books is invalid.

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65 Survey : Scope and validity : S. 133A of
Income-tax Act, 1961 : Survey of premises of C.A., lawyer, etc. in connection
with survey of client : In the absence of a statement by the client that its
books of account are kept at the premises of C.A., survey conducted in the
premises of the C.A.’s firm and impounding books, documents, etc. is invalid.


[U. K. Mahapatra & Co. v. ITO, 221 CTR 328 (Ori.)]

The petitioner is a firm of Chartered Accountants engaged in
the practice of accountancy involving auditing, consultancy, financing and other
services to their clients. A survey party conducted a survey at the premises of
the petitioner-firm and also impounded certain books of account and documents.

 

On writ petition challenging the validity of survey action,
the Orissa High Court allowed the petition and held as under :

“(i) The precondition for conducting survey u/s. 133A in
the premises of a Chartered Accountant, lawyer, tax practitioner in connection
with survey of the business place of their client is that the client in the
course of survey must state that his books of account/documents and records
are kept in the office of his Chartered Accountant/lawyer/tax practitioner.
Unless this precondition is fulfilled, the IT authority does not assume any
power to enter the business premises/office of the Chartered
Accountant/lawyer/tax practitioner to conduct survey u/s.133A in connection
with survey of the premises of their client.

(ii) There being no material to show that survey of
premises of firm of Chartered Accountants was undertaken consequent upon any
statement of its client that its books of account were kept in the premises of
the Chartered Accountants, survey conducted at the premises of Chartered
Accountant’s firm was without authority of law.”


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Assessment u/s.143(3) on basis of directions of CIT : Sub-sequent CIT exercising power u/s.263 : Not justified.

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64 Revision : S. 263 of Income-tax Act,
1961 : A.Ys. 1980-81 to 1986-87 : Assessment made u/s.143(3) on basis of
directions of CIT : Subsequent CIT exercising power u/s.263 : Not justified.


[Virendra Kumar Jhamb v. N. K. Vohra, 176 Taxman 11
(Bom.)]

The assessee was doing various types of construction work and
was not maintaining regular books of account. For the A.Ys. 1980-81 to 1986-87,
it approached the Deputy Director of Intelligence (Investigation) under the
Amnesty Scheme and offered the taxable income to be computed at the rate of 4%
of the total receipts. Finally, after discussing with the Deputy Director of
Intelligence and the Commissioner, it was mutually agreed upon that the assessee
would file revised returns for the relevant assessment years at the rate of 8%
of the gross receipts. This was confirmed by the second Commissioner by his
letter dated 30-11-1997. On the basis of the said letter of the Commissioner,
the Assessing Officer completed the assessment u/s. 143(3) of the Income-tax
Act, 1961 computing the income at the rate of 8% of the gross receipts.
Subsequently, third Commissioner issued notices u/s.263 seeking to revise the
assessment orders for the relevant years.

 

The assessee filed writ petition and challenged the notices.
The Bombay High Court allowed the writ petition, quashed the notices and held :

“(i) The Assessing Officer had passed revised assessment
orders based on the revised returns at 8%. The said orders were solely based
on the directive given by the earlier Commissioner and the same could not be
revised by the subsequent Commissioner exercising the power u/s.163.

(ii) Over and above, there was no error or anything
unsustainable in law. On the contrary, when the second Commissioner had
consistently taken the view that 8% would be a fair percentage, the third
Commissioner could not consider the same as ‘erroneous’ or unsustainable in
law. Therefore, the notices issued u/s. 163 as well as revised assessment
orders passed by the Commissioner were totally unsustainable in law for the
aforesaid reasons. Hence, all the notices issued u/s.263 as well as the
assessment orders passed by the Commissioner had to be quashed and set aside.”


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S. 147 and S. 148 : Change of opinion is not valid basis for reopening assessment

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62 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Y. 2003-04 : Change of opinion is not valid basis for
reopening assessment.


[Asteroids Trading and Investments P. Ltd. v. DCIT,
308 ITR 190 (Bom.)]

In the regular assessment u/s.143(3) of the Income-tax Act,
1961 for the A.Y. 2003-04, the AO had allowed the assessee’s claim for deduction
u/s.80M of the Act. Subsequently, a notice u/s.148 of the Act, dated 27-12-2006
was issued claiming that the income chargeable to tax has escaped assessment.
The objection filed by the assessee-company to the issue of notice was rejected.

The Bombay High Court allowed the writ petition filed by the
assessee challenging the validity of the notice and held :

“(i) The power conferred u/s.147 of the Income-tax Act,
1961, cannot be used like the power of review to reopen the assessment.
U/s.147 of the Act, assessments cannot be reopened on a mere change of
opinion.

(ii) The assessee-company had fully disclosed material
facts necessary for claiming deduction u/s.80M of the Act and there was
application of mind by the AO in allowing the deduction claimed by the
assessee in the assessment order. Though the notice u/s.148 was issued on the
ground that there was reason to believe that the income had escaped
assessment, there was neither any change of law, nor had any new material been
brought on record between the date of the assessment order and the date of
formation of opinion by the AO. It was merely a fresh application of mind by
the Officer to the same set of facts and the reassessment proceedings were
initiated based on the change of opinion of the Officer.”

 


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S. 147 and S. 148 : Change of opinion is not valid basis for reopening assessment.

New Page 1

63 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Y. 2003-04 : Change of opinion is not valid basis for
reopening assessment.


[Asian Paints Ltd. v. DCIT, 308 ITR 195 (Bom.)]

For the A.Y. 2003-04, the assessee’s claim for deduction of
expenditure on wages, provident fund contribution, gratuity and superannuation
fund was allowed by the Assessing Officer after calling for details in respect
of the same. Subsequently a notice u/s.148 was issued on 27-12-2006 for
reopening the assessment. The assessee’s objection that the assessment cannot be
validly reopened merely on the basis of change of opinion was rejected.

 

The Bombay High Court allowed the writ petition filed by the
assessee challenging the validity of the notice and held :

“(i) When a regular order of assessment is passed in terms
of S. 143(3) of the Income-tax Act, 1961, a presumption can be raised that
such an order has been passed on application of mind. If non-application of
mind by the Assessing Officer in passing an order would itself confer
jurisdiction upon the Assessing Officer to reopen the proceeding without
anything further, it would amount to giving premium to an authority exercising
quasi-judicial function to take benefit of its own wrong. The Legislature has
not conferred power on the Assessing Officer to review its own order.

(ii) Initiation of reassessment proceedings would amount to
change of opinion of the Assessing Officer as it was merely a fresh
application of mind by the Assessing Officer to the same set of facts. Since
the Assessing Officer had failed to apply his mind to the relevant material
while framing the assessment order, he could not take advantage of his own
wrong and reopen the assessment u/s.147 of the Act.”

 


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S. 23 : Standard rent not fixed : Annual value determined on basis of actual rent received

New Page 1

61 Income from house property : Annual
value : S. 23 of Income-tax Act, 1961 : Standard rent not fixed : Annual value
to be determined on the basis of actual rent received.


[CIT v. Sarabhai (P) Ltd., 176 Taxman 6 (Guj.)]

As per the rental agreement, the assessee-company had
received rental income of Rs.27,467 in the relevant year. The assessee-company
computed the house property income on the basis of the rent of Rs.27,467 so
received. The AO computed the house property income on the basis of the rental
value of Rs.1,36,508 fixed by the Small Causes Court and determined the annual
letting value of the property at Rs.1,57,675. The Tribunal deleted the addition.

 

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

“(i) As in the instant case, there was no fixation of
standard rent by any competent Court under the rent control legislation, the
same would not apply or if the standard rent was to be fixed as per the scheme
of the Rent Control Legislation, it might be required to be computed and
calculated. However, as per the language of the
relevant provisions of the Act, the higher amount is to be considered and it
was not a case of the Revenue, that the standard rent, if assessed as per the
rent control legislation, may exceed the
actual rental income received by the assessee; the income as assessed based on
the actual rental income was rightly approved by the Tribunal.

(ii) The Tribunal was right in setting aside the assessment
based on the annual rental value and was right in directing the assessment to
be made based on the actual rental income received by the assessee on the
basis of the rental agreement.”

 


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Purchase of goods by advance payment to seller : Interest earned on advance is business income eligible for deduction u/s.10B

New Page 1

60 Exemption of income : S. 10B of
Income-tax Act, 1961 : A.Ys. 1993-94 and 1994-95 : Assessee purchasing goods by
making advance payment to seller: Interest earned on advance amount is business
income eligible for deduction u/s.10B.


[CIT v. Hycon India Ltd., 308 ITR 251 (Raj.)]

The assessee had made advance payment for purchase
of goods on which the assessee earned interest income. For the A.Y. 1993-94 the
AO granted exemption u/s.10B of the Income-tax Act, 1961, in respect of such
interest income also. Exercising the powers u/s.163, the Commissioner held that
the assessee is not entitled to exemption u/s.10B in respect of the interest
income. The Tribunal reversed the order of the Commissioner and held that the
interest income was the income from business. The same view was taken by the
Tribunal for the A.Y. 1994-95.

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

“(i) ‘Profits and gains of business or profession’ and
‘income from other sources’ are different
species of income. S. 2(24) of the Income-tax Act, 1961, does not categorise
separately, profits and gains of business or profession. The expression
‘profits and gains’ used in S. 2(24) is wider and is not confined to ‘profits
and gains of business or profession’. S. 10B provides for
exemption with respect to any ‘profits and gains’ derived by the assessee, and
is not confined to ‘profits and gains of business or profession’.

(ii) The interest income received by the assessee did fall
within the expression ‘profits and gains’ and was eligible for exemption as
business income u/s.10B.”


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Capital gains : Ss. 45, 48 and 55A : Computation : Full value of consideration is actual consideration : Market value has no relevance : Reference to Valuation Officer not valid.

New Page 1

58 Capital gains : Computation : S. 45, S.
48 and S. 55A of Income-tax Act 1961 : A.Y. 1998-99 : Computation u/s.48 : Full
value of consideration is actual consideration : Market value has no relevance :
Reference to Valuation Officer u/s.55A not valid.


[CIT v. Smt. Nilofer I. Singh, 221 CTR 277 (Del.)]

In the previous year relevant to the A.Y. 1998-99 the
assessee had sold two properties for considerations of Rs.10,00,000 and
Rs.23,50,000, respectively. The AO referred the matter to the Valuation Officer
who valued the two properties at Rs.14,55,200 and Rs.53,73,000, respectively.
The AO computed the capital gain on the basis of the market value which resulted
in the addition of Rs.34,72,000. The Tribunal deleted the addition.

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

“(i) The expression ‘full value of the consideration’ used
in S. 48 does not have any reference to the market value, but only to the
consideration referred to in the sale deeds as the sale price of the assets
which have been transferred.

(ii) In the case of sale simplicitor where the full value
of consideration is the sale price of the asset transferred, there is no
necessity of computing fair market value. Hence, the Assessing Officer could
not have referred the matter to the Valuation Officer. The events under which
a reference u/s.55A can be made are like the ones occurring in S. 45(4) and S.
45(1A).”



Editor’ note : W.e.f. 2003-04, the provisions of S. 50C
would also need to be considered.

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Refund from excise duty is income derived from business eligible for deduction u/s.80-IB

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59 Deduction u/s.80-IB of Income-tax Act,
1961 : A.Y. 2000-01 : Refund from excise duty is income derived from business of
industrial undertaking eligible for deduction u/s. 80-IB.


[CIT v. Dharam Pal Prem Chand Ltd., 221 CTR 133
(Delhi)]

For the A.Y. 2000-01 the assessee’s claim for deduction
u/s.80-IB of the Income-tax Act, 1961 included refund of excise duty amounting
to Rs.2,61,92,386 in respect of the industrial unit in question. The Assessing
Officer disallowed the claim for deduction, holding that the refund received on
account of excise duty was not ‘income derived from any business of the
industrial undertaking’. The Tribunal allowed the assessee’s claim.

 

The Delhi High Court upheld the decision of the Tribunal and
held :

“(i) The assessee was granted exemption from payment of
excise duty under various Notifications. Modality of exemption was that the
assessee, in the first instance, had to pay excise duty on clearance of goods
and after verification by the excise authorities, refund was granted. In the
circumstances, the contention of the Revenue that refund of excise duty has no
direct nexus with the assessee’s industrial activity and that it was dependent
on Notification is not tenable.

(ii) Other contention of the Revenue that if deduction
u/s.80-IB was granted, the assessee would get double benefit, once as relief
u/s.80-IB and secondly, the assessee would pass on the excise duty paid to the
customers and recover in the form of sale price is equally untenable, as
firstly, no such claim was set up by the Revenue before any of the lower
authorities and secondly, goods manufactured by the assessee not being inputs
for any other goods, apprehension of the Revenue has no substance.”


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Interest on borrowed capital : Deduction u/s.36(1)(iii) of Income-tax Act, 1961 : A.Ys. 1986-87 to 1988-89 : Amount borrowed at 16% interest and invested in 4% non-cumulative preference shares : No evidence that transaction not genuine : No part of intere

New Page 2

7 Interest on borrowed
capital : Deduction u/s.36(1)(iii) of Income-tax Act, 1961 : A.Ys. 1986-87 to
1988-89 : Amount borrowed at 16% interest and invested in 4% non-cumulative
preference shares : No evidence that transaction not genuine : No part of
interest could be disallowed.


[CIT v. Pankaj Munjal
Family Trust, 326 ITR 286 (P&H)]

For the A.Ys. 1986-87 to
1988-89, the assessee had claimed deduction of interest at the rate of 16%
borrowed for purchase of 4% non-cumulative preference shares. The Assessing
Officer restricted the allowance to 4% and disallowed the balance interest. The
Tribunal allowed the full claim.

In reference at the instance
of the Revenue, the following question of law was raised :

“Whether, on the facts and
in the circumstances of the case, the Appellate Tribunal was right in law in
allowing interest as claimed by the assessee at a higher rate on borrowings to
the nominal fixed return on investments made in purchase of shares out of such
borrowings from family concerns ?”

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

“(i) It is not the case of
the Revenue that the assessee had not paid interest to the lender. Merely
because the assessee had invested the borrowed amount for the purchase of 4%
non-cumulative preference shares, it could not be presumed that the
transaction was colourable. The Revenue had not brought on record any evidence
to show that the interest paid by the assessee on the borrowed amount was
highly exorbitant and no such interest rate was ever prevalent in the market.

(ii) Therefore, the
Tribunal was right in law in allowing interest as claimed by the assessee.”

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Writ petition — Even if small fraction of cause of action accrued within the territories of a State, the High Court of that State will have jurisdiction

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16 Writ petition — Even if small fraction of cause of action
accrued within the territories of a State, the High Court of that State will
have jurisdiction


[Rajendran Chingaravelu v. R. K. Mishra, Addl. CIT,(2010) 320
ITR 1 (SC)]

Investigation — When the bona fides of a passenger carrying
an unusually large sum, and his claims regarding the source and legitimacy have
to be verified, some delay and inconvenience is inevitable. The inspection and
investigating officers have to make sure that the money was not intended for any
illegal purpose. In such a situation, the rights of the passenger will have to
yield to public interest. Any bona fide measures taken in public interest, and
to provide public safety or to prevent circulation of black money, cannot be
objected to as interference with the personal liberty or freedom of a citizen.

The appellant, a computer engineer, who was lucratively
employed in the United States of America for more than ten years, returned to
India with his earnings and took up employment in Hyderabad in the year 2006. He
wanted to buy a property at Chennai. But his attempts were not fruitful. He was
advised that if he wanted to buy a good plot, he must be ready to pay
considerable part of the sale price in cash as advance to the prospective
seller. When the appellant ultimately identified a prospective seller, he wanted
to go to Chennai with a large sum and finalise the deal. He contacted the
Reserve Bank of India, ICICI Bank (his banker) and the airport authority to find
out whether he could carry a large sum of money in cash while travelling. He was
informed that there was no prohibition. Thereafter, he drew Rs.65 lakhs from his
bank. He travelled by air from Hyderabad to Chennai on June 15, 2007, carrying
the said cash. At the Hyderabad airport, he disclosed to the security personnel
who checked his baggage that he was carrying cash of Rs.65 lakhs along with a
bank certificate certifying the source and withdrawals. After the contents of
his bags were examined by the security personnel, he was allowed to board the
aircraft without any objection. But when the flight reached Chennai, some police
officers and others (who were later identified as officers of the Income-tax
Investigation Wing) rushed in, and loudly called out the name of the appellant.
When the appellant identified himself, he was virtually pulled from the aircraft
and taken to an office in the first floor of the airport. He was questioned
there about the money he was carrying. The appellant showed them the cash and
the bank certificate evidencing the withdrawals and explained as to how the
amounts formed part of his legitimate declared earnings which were drawn from
his bank’s account. He also explained to them the purpose of carrying such huge
amount. The officers recorded his statement. After a few hours, the second
respondent came in and asked the appellant to sign some papers without allowing
him to read them and without furnishing him copies. It became obvious to the
appellant that the officers of the Income-tax Department were suspecting him of
carrying the money illegally. They even attempted to coerce him to admit that
the amount was being carried by him for some illegal purpose. Having failed,
they seized the entire amount under a mahazar, gave him a receipt and permitted
him to leave. In this process, he was detained for about 15 hours without any
justifiable reason. To add insult to the injury, the Tax Intelligence Officers
prematurely and hurriedly informed the newspapers that they had made a big haul
of Rs.65 lakhs in cash, making it appear as though the appellant was illegally
and clandestinely carrying the said amount, and they had successfully caught him
while he was at it. The next day all three leading Tamil newspapers (Daily
Thanthi, Dinamalar, Dinamani) as also an English daily — The Hindu, prominently
carried the news of the seizure from him. The news reports disclosed his name,
profession, his native place in Tamil Nadu, his place of employment. The news
report also stated that he was not able to satisfactorily explain the source of
the amount and that the officials had found discrepancies between what was drawn
by him from the bank and what he was carrying. Ultimately, two months later,
after completing the investigation and verification, as nothing was found to be
amiss or irregular, the seized money was returned to him, but without any
interest.

The appellant filed a writ petition before the High Court
listing the following four acts on the part of the income-tax officials as
objectionable and violative of his fundamental rights : (i) his illegal
detention for more than 15 hours at the Chennai airport; (ii) illegal seizure of
the cash carried by him despite his explanation about the source and legitimacy
of the funds with supporting documents; (iii) failure to return the seized
amount for more than two months without any justification; and (iv) prematurely
and maliciously disclosing to the media a completely false picture of the
incident. The said acts, according to him, tarnished his reputation among his
friends, relatives and acquaintances, by being dubbed as some sort of a
criminal. The said writ petition was dismissed by the High Court on the ground
that no part of the cause of action arose within Andhra Pradesh.

On appeal, the Supreme Court held that the High Court did not
examine whether any part of cause of action arose in Andhra Pradesh. Clause (2)
of Article 226 makes it clear that the High Court exercising jurisdiction in
relation to the territories within which the cause of action arises wholly or in
part, will have jurisdiction. This would mean that even if a small fraction of
the cause of action (that bundle of facts which gives a petitioner, a right to
sue) accrued within the territories of Andhra Pradesh, the High Court of that
State will have jurisdiction. In this case, the genesis for the entire episode
of search, seizure and detention was the action of the security/intelligence
officials at Hyderabad airport (in Andhra Pradesh), who having inspected the
cash carried by him, alerted their counterparts at the Chennai airport that the
appellant was carrying a huge sum of money, and required to be intercepted and
questioned. A part of the cause of action, therefore, clearly arose in
Hyderabad. The Supreme Court also noticed that the consequential income-tax
proceedings against the appellant, which he challenged in the writ petition,
were also initiated at Hyderabad. Therefore, according to the Supreme Court the
writ petition ought not to have been rejected on the ground of want of
jurisdiction.

Considering the facts of the case, the Supreme Court
requested Mr. Gopal Subramanium, the learned Solicitor General to take notice
and suggest a solution. He agreed to have the matter examined as to whether
there was a need for issue of guidelines. Taking note of the issue, the Central
Board of Direct Taxes, Ministry of Finance issued a Circular dated November 18,
2009, setting out the guidelines to be followed by Air Intelligence Units or
Investigation Units while dealing with air passengers with valuables at the
airports of embarkation or destination, to avoid any undue convenience to them.

The Supreme
Court observed that when the bona fides of a passenger carrying an unusually
large sum, and his claims regarding the source and legitimacy have to be
verified, some delay and inconvenience is inevitable. The inspection and
investigating officers have to make sure that the money was not intended for
any illegal purpose. In such a situation, the rights of the passenger will have
to yield to public interest. Any bona fide measures taken in public interest,
and to provide public safety or to prevent circulation of black money, cannot
be objected to as interference with the personal liberty or freedom of a
citizen. According to the Supreme Court the actions of the officers of the
investigation wing in detaining the appellant for questioning and verification,
and seizing the cash carried by him, were bona fide and in the course of
discharge of their official duties and did not furnish a cause of action for
claiming any compensation.

 

The Supreme Court however held that the appellant’s grievance in
regard to media being informed about the incident even before completion of
investigation, was justified. The Supreme Court there is a growing tendency
among investigating officers (either police or other departments) to inform the
media, even before the completion of investigation, that they have caught a
criminal or an offender. Such crude attempts to claim credit for imaginary
breakthroughs should be curbed.

 

The Supreme
Court however was of the view that the bona fides of the intelligence wing
officials at Chennai was not open to question, though their enthusiasm might
have exceeded the limits when they went to press in regard to the seizure.

Bad debts: S. 36(1)(vii), (2) of I. T. Act, 1961: A. Y. 2001-02: Assessee share broker purchasing shares for clients and paying money: Money not recoverable from client: Deduction allowable as bad debt:

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Reported:

 

42 Bad debts: S. 36(1)(vii), (2) of I. T. Act, 1961: A. Y.
2001-02: Assessee share broker purchasing shares for clients and paying money:
Money not recoverable from client: Deduction allowable as bad debt:

CIT vs. Bonanza Portfolio Ltd.; 320 ITR 178 (Del):

The assessee was in the business of share broking. In the
course of its business, the assessee purchased shares on behalf of its clients
and paid the purchase money. The brokerage received by the assessee was shown as
income in its books of account of the immediate previous year. Since the balance
amount of Rs. 50,30,491/- could not be recovered from the client, the assessee
wrote-off the amount as bad debt. The assessee claimed the deduction of the said
amount as bad debt. The Assessing Officer disallowed the claim on the ground
that the conditions for allowing the amount as bad debt, as stipulated in
section 36(1)(vii) and read with sub-section (2), were not satisfied. The
Tribunal held that the conditions are satisfied and allowed the claim.

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

“i) The money receivable from the client had to be treated
as bad, and since it became bad, it was rightly considered as bad debt and
claimed as such by the assessee in the books of account.

ii) Since the brokerage payable by the client was a part of
the debt and that debt had been taken into account in the computation of the
income, the conditions stipulated in section 36(1)(vii) and (2) stood
satisfied.”

 


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Export profit : Deduction u/s.80HHC r/w S. 10A of Income-tax Act, 1961 : A.Y. 2003-04 : Assessee is entitled to deduction u/s.80HHC for remaining 10% of profit, which was to suffer tax after applying S. 10A/10B.

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Reported :

26. Export profit :
Deduction u/s.80HHC r/w S. 10A of Income-tax Act, 1961 : A.Y. 2003-04 : Assessee
is entitled to deduction u/s.80HHC for remaining 10% of profit, which was to
suffer tax after applying S. 10A/10B.

[CIT v. Ambatturre
Clothing Ltd., 194 Taxman 79 (Mad.)]

The assessee, an export
concern was entitled to deduction u/s.10A/10B and u/s.80HHC of the Income-tax
Act, 1961. For the A.Y. 2003-04 the assessee had claimed deduction u/s.10A/10B
of the Act and the same was allowed. The assessee had also claimed deduction
u/s.80HHC for the remaining 10% of the profit, which to suffer tax after
applying S. 10A/10B. The claim was allowed by the Assessing Officer.
Subsequently, the Assessing Officer rectified the assessment order u/s.154 and
withdrew the deduction allowed u/s.80HHC, holding that it amounted to double
deduction. The Tribunal cancelled the rectification order.

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

“(i) According to the
Assessing Authority, such a claim made u/s.80HHC in respect of the remaining
10% of the profits amounted to a claim of double deduction, which was not
permissible. On the said basis, the Assessing Authority took the view that the
said issue was an apparent mistake on the face of the record, which he
rectified by passing his order dated 11-6-2007.

(ii) When we examine the
issue raised in this appeal, at the very outset, it will have to be pointed
out that even u/s.10A(6)(iii) of the Act, there is a specific
provision, which reads as under :

“No deduction shall be
allowed u/s.80HH or u/s.80HHA or u/s.80-I or u/s.80-IA or u/s.80-IB in
relation to the profits and gains of the undertaking; “

(iii) The very statutory
provision prescribing a prohibition in respect of the deductions in relation
to the profits and gains itself, has not specifically included S. 80HHC.
Apparently, it therefore would only mean that there was no prohibition for
claiming any deduction u/s. 80HHC while applying the benefits provided u/s.10A
of the Act. If that is the statutory prescription, by which the assessee was
entitled to claim a benefit u/s.80HHC in relation to the profits and gains
while invoking S. 10A, it will have to be concluded that the assessment order
in having allowed such a deduction of the remaining 10% of the profits earned
by the assessee, was not erroneous.

(iv) In any event, having
regard to such a statutory prescription available for the assessee to claim
the benefit u/s.80HHC in respect of the profits earned from S. 10A of the Act,
there is absolutely no scope for the Assessing Authority to have invoked S.
154 of the Act, in order to state that, that can be considered as an error
apparent, inasmuch as there was no error at all, much less, apparent error to
be rectified by the Assessing Authority.

(v) This conclusion of
ours is apart from the conclusion of the Tribunal in having held that in that
situation what was held by the Assessing Authority in the original assessment
order was a possible view and that cannot be considered as an error apparent
on the face of the records.”

 


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Search and seizure — Amounts lying in the bank account cannot be withdrawn and seized.

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12 Search and seizure — Amounts lying in the bank account
cannot be withdrawn and seized.


[K. C. C. Software Ltd. v. DIT (Inv), (2008) 298 ITR 1
(SC)]

During the course of search and seizure action, the
Department issued warrant of authorisation u/s.132 on 4-10-2005 in respect of
bank accounts (which were disclosed in the regular books of accounts) and
withdrew the cash by demand drafts. On 8-10-2005, the bank informed the assessee
about the search and seizure and the withdrawals made by the Department. On
28-10-2005, the assessee was supplied with copy of the Panchnama. On 29-10-2005,
the assessee requested the Department to adjust a sum of Rs.77,68,177 towards
self-assessment tax for the A.Y. 2005-06 from the seized amount of
Rs.1,81,91,982 and to release the balance. On 29-11-2005, an application was
made u/s.132B for release of the seized amount. On 16-2-2006, the assessee
requested that a further amount of Rs.40,00,000 be adjusted from the seized
amount against advance tax for A.Y. 2006-07 and to release the balance.

Since the Department failed to respond to the request of the
assessee, writ petitions were filed to release the amounts seized after the
adjustments as requested and to quash and set aside the warrants of
authorisation dated 4-10-2005. In reply filed by the Department, it was inter
alia contended that the application made u/s.132B was disposed of on
1-2-2006 and that the bank accounts in question were undisclosed.

In rejoinder the assessee pointed out that the said order
dated 1-2-2006 was not served upon them. The Delhi High Court dismissed the
petitions observing that the Department had taken a stand that there was
estimated tax liability of approx. Rs.10 crores and the satisfaction note dated
13-9-2005 of ADIT, Unit 1 and notings of the Director (Investigation) clearly
indicated that the stand of the assessee was without substance.

Before the Supreme Court, the assessee contended that the
seizure was without jurisdiction and that there was no power u/s.132B for
retaining any amount seized for the purpose of meeting estimated liability. The
stand of the Revenue was that as the assessee was unable to satisfactorily
explain the sources of fund lying in the bank account, the same were seized and
an authorised officer has full power and jurisdiction to seize cash balance
lying in bank account as these would come within the meaning of ‘money’ and/or
‘assets’ as provided u/s. 132(1)(iii). Further, the money had been withdrawn in
terms of ‘Search and Seizure Manual, 1989’, particularly paragraphs 5.01 and
5.02 thereof. Further, reference to S. 153A in S. 132B showed that the amount
could be retained for the estimated liability.

The Supreme Court, after referring to the ‘Search and Seizure
Manual’ held that it was clear that the same was relatable to cash seized and
cash in bank is conceptually different from cash in hand. The Supreme Court
referred to the authorities to conclude that the banker is not an agent or
factor but he is a debtor. The Supreme Court held that it is impermissible to
convert assets to cash and thereafter impound the same. However, the Supreme
Court did not go into the broader issue in view of the fact that there was no
challenge to the order passed u/s.132B and did not grant any relief to the
assessee and as there was time up to 31-3-2008 for completing the assessment,
the Supreme Court directed that the amount seized be kept in interest-bearing
fixed deposit, as in the event the assessee succeeds, it would be entitled to
interest as provided in statute.


 

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Assessment — Evidence — Out of the ten summons issued five parties appeared and gave evidence in favour of the assessee, but other five did not appear as the summons could not be served upon them — No adverse inference can be drawn against the assessee.

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11 Assessment — Evidence — Out of the ten summons issued five
parties appeared and gave evidence in favour of the assessee, but other five did
not appear as the summons could not be served upon them — No adverse inference
can be drawn against the assessee.


[Anis Ahmad and Sons v. CIT(A), (2008) 297 ITR 441
(SC)]

The appellant-assessee was carrying on business as commission
agent in raw hides and skins. The raw hides and skins comprised of buffalo
hides, cow hides, katta and katai or goat and sheep skins. The goods are brought
in the mandi (market) by vyaparis (traders) through trucks. These vyaparis go to
different arhatdaars (commission agents) of their choice where they get the
goods counted.

The amount is first entered in the bilti register, after that
bundles are prepared and each vyapari is given his lot number. Sometimes, the
vyaparis request the arhatdaar to pay the freight chargers of the trucks. The
arhatdaar opens an account of each vyapari in his ledger book where the numbers
of different types of each vyapari and the numbers of different types of pieces
of raw hides are entered without entering the money value thereof. The vyaparis
sometimes stay in the mandi for 4 or 5 days to study the market themselves and
then they give instructions to arhatdaars for selling their goods.

When goods are sold, the sale price minus commission and
other charges are credited to the account of the vyaparis and commission charges
or other charges receivable are credited to the relevant accounts and the full
sale price of the goods is debited to the account of the purchaser. The
arhatdaars maintains full details, such as weight rate, the names of vyaparis
whose goods are sold and names of the purchasers in taul/shumar bahi. This book
contains original entry. Thereafter, entries are passed through jakar and posted
in the relevant accounts of the ledger. This practice is being followed by each
and every arhatdaar.

The vyaparis are paid the balance amount generally in cash,
in instalments or full after receipt of the amount from the customers. The rate
of commission on different types of hides and skins is settled by the
association and no arhatdaar can charge anything more on that account. The
appellant-assessee filed its income-tax return for the A.Y. 1984-85 declaring
Rs.1,32,830 as its total income as commission agent. The Income-tax Officer,
vide assessment order dated March 13, 1987, framed u/s.143(3) of the Act,
treated the appellant-assessee as ‘a trader’ and not as ‘a commission agent’ and
assessed its total income at Rs.4,06,810.

Being aggrieved, the appellant-assessee preferred an appeal
before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax
(Appeals) vide order dated April 4, 1988, partly allowed the appeal. The
appellant-assessee and the respondent-Income-tax Department feeling aggrieved
against the order of the Commissioner of Income-tax (Appeals) filed two separate
appeals before the Income-tax Appellate Tribunal. The Tribunal by order dated
August 19, 1993, without going into the merits of the case, set aside the
assessment order and remanded the file back to the Assessing Officer to re-scrutinise
the entire accounts after giving the appellant-assessee an opportunity of being
heard and also giving the appellant-assessee an opportunity of filing any
evidence in support of its claim that there was no discrepancy in its accounts
as pointed out by the Assessing Officer or as found out by the Commissioner of
Income-tax (Appeals) in his order dated April 4, 1988.

On remand, the Assessing Officer issued summons to ten
traders u/s.131(1) of the Act. In response to the summons, five traders appeared
and gave evidence in favour of the appellant-assessee. The remaining five
traders did not appear because they could not be served with the summons as they
were residing outside the State of U.P.

The assessing authority drew an adverse inference against the
claim of the appellant-assessee and assessed Rs.2,30,704 as the total income for
the A.Y. 1984-85, treating the transactions with the absentee traders as having
been done by the appellant-assessee in the capacity of ‘trader’ and not as
‘commission agent’.

The appellant-assessee assailed the impugned order dated
March 29, 1996, of the assessing authority before the Commissioner of Income-tax
(Appeals), who, vide his order dated June 9, 1997, set aside the addition by
holding the appellant-assessee as an ‘arhatiya’. The Revenue, feeling aggrieved,
preferred an appeal before the Income-tax Appellant Tribunal. The Tribunal by
its order dated January 15, 2004, allowed the appeal and held that the
appellant-assessee has failed to produce any evidence that the transactions, in
question, were not conducted by the appellant-assessee as  ‘vyapari’, but the
transactions were conducted on commission basis. Being aggrieved by the said
order, the appellant-assessee filed an income-tax appeal before the High Court.
The High Court has concurred with the findings recorded by the Assessing Officer
as confirmed by the Appellate Tribunal and dismissed the appeal in limine.

On appeal, the Supreme Court noted that the record revealed
that for the year 1983-84, the assessing authority had accepted the claim of the
appellant-assessee dealing in the business of hides and skins as ‘a commission
agent’. The appellant-assessee filed a chart of payments made to the purchasers
by the traders through the appellant-assessee acting as a commission agent. The
five traders who appeared before the assessing authority had supported the claim
of the appellant-assessee to be a commission agent and not ‘a trader’ and the
assessing authority has accepted their evidence holding the appellant-assessee
as a commission agent in respect of the transactions conducted with them by the
traders.

The Supreme Court held that the appellant-assessee could not be held responsible for non-appearance of those five traders to whom the summons were issued by the assessing authority, as they are residing outside the State of U.P. For non-appearance of those traders, no adverse inference ought to have been drawn by the authorities below and the appellant-assessee has led satisfactory evidence that its business is only that of a commission agent and not ‘a trader’ dealing in the goods.

Valuation of closing stock — Application to review the decision in CIT v. Hindustan Zinc Ltd. — Rejected

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4 Valuation of closing stock — Application to
review the decision in CIT v. Hindustan Zinc Ltd. — Rejected


[Hindustan Zinc Ltd. v. CIT, (2007) 295 ITR 453 (SC)]

The Supreme Court in CIT v. Hindustan Zinc Ltd., [(2007) 291
ITR 391] had held that goods should not be written down below the cost, except
where there is an actual or anticipated loss and if the fall in the price is
only such as it would reduce merely the prospective profits, there would be no
justification to discard the initial valuation at cost. The assessee’s
application to review the aforesaid judgment was rejected by the Supreme Court,
holding that no case for review was made out.

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Questions of Law — No interference made on findings — Questions of law left open.

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2 Questions of Law — No interference made on
findings — Questions of law left open.


[CIT v. Alfa Laval (India) Ltd., (2008) 295 ITR 451 (SC)]

The Bombay High Court in Alfa Laval (India) Ltd. v. Deputy
Commissioner of Income-tax, (266 ITR 418) had held as follows :

(1) the assessee is entitled to value the closing stock at
market value or at cost, whichever is lower and the Assessing Officer was not
justified in valuing the items in question at 50% of the cost without
disclosing the basis of such valuation as against valuation made by the
assessee at 10% of the cost based upon auditor’s certificate and which items
were in fact sold in the subsequent year at a price less than 10%.

(2) the depreciation written back as a result of change in
the basis of working out depreciation in compliance with the Circular of the
Company Law Board and credited to the profit and loss account should not be
reduced in working out the relief u/s.32AB(3) of the Act, as it could be said
that there was withdrawal of amount from reserve or provisions.

(3) the interest from customers and sales tax set-off
received by the assessee being assessed as the part of business profits under
head ‘Profits or gains of business or profession’, the same could not be
excluded while calculating deductions u/s.80HHC of the Act.

 

On an appeal against the aforesaid order by the Department to
the Supreme Court, the Supreme Court dismissed the appeal stating that it was
not the case which required interference and left the question of law open.

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Rectification of mistake — Non-consideration of material on record amounts to mistake apparent from record.

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3 Rectification of mistake —
Non-consideration of material on record amounts to mistake apparent from record.


[Honda Siel Power Products Ltd. v. CIT, (2007) 295 ITR
466]

The assessee-company, engaged in the manufacture of portable
generator sets in technical collaboration with Honda Motor Company, Japan filed
its return of income for the A.Y. 1991-92 on December 30, 1991, declaring nil
income. During the relevant year, the assessee had taken a term loan in foreign
exchange for import of machinery. On account of fluctuation in the foreign
exchange rate, the liability of the assessee to repay the loan in terms of
rupees went up by Rs.7,10,910. By referring to the provisions of S. 43A, the
assessee enhanced the figure of WDV (written-down value) of the block of assets
and claimed depreciation accordingly. The Assessing Officer came to the
conclusion that such revision in the actual cost was not admissible as S. 43A
refers to adjustment qua the actual cost of the machinery on account of increase
or decrease in the liability of unpaid loans utilised for the purchase of
machinery. Aggrieved by the said decision, the matter was carried in appeal by
the assessee before the Commissioner of Income-tax (Appeals) who took the view
that the claim of the assessee was admissible in view of the fact that in the
year preceding the A.Y. 1991-92, increased depreciation was given to the
assessee. On this aspect, therefore, the Department carried the matter in appeal
to the Tribunal for both the A.Ys. 1990-91 and 1991-92. The Tribunal held that
the Commissioner of Income-tax (Appeals) had erred in allowing the enhanced
depreciation as u/s.43A. Actual payment was a condition precedent for availing
of the benefit under that Section. According to the Tribunal, if actual payment
was not made after fluctuation, then the value of the asset cannot be increased
by adding the increase on account of fluctuation. On the facts, the Tribunal
found that in the present case, there was no actual payment after the
fluctuation and, therefore, the assessee was not entitled to claim the benefit
u/s.43A. The assessee moved the Tribunal for rectification of mistake apparent
from its order. In the rectification application, the assessee pointed out the
earlier judgment of the Co-ordinate Bench of the Tribunal in the case of
Deputy CIT v. Samtel Color Limited, in which it was held that enhanced
depreciation was allowable even on notional increase in the cost of the asset on
account of exchange rate fluctuation and despite the fact that the additional
liability resulting from the said fluctuation had not been paid by the assessee.
It was held that the word ‘paid’ in S. 43(2) meant amount actually paid or
incurred according to the method of accounting. In this connection, reliance was
also placed by the Tribunal on Circular No. 5-P of the Central Board of Direct
Taxes, dated October 9, 1967. The Tribunal, allowed the rectification
application filed by the assessee stating that the judgment of the Co-ordinate
Bench in Samtel Color Limited (supra) had escaped its attention. Against
the said order, the Department carried the matter in appeal to the High Court.
The High Court came to the conclusion, relying on its earlier decision, that the
power to rectify any mistake was not equivalent to a power to review or recall
the order sought to be rectified. The High Court came to the conclusion that in
the guise of rectification, the Tribunal had, in fact, reviewed its earlier
order which fell outside the scope of S. 254(2) of the 1961 Act and,
consequently, the High Court set aside the order of the Tribunal passed in
Miscellaneous Application. On appeal, the Supreme Court held that the Tribunal
was justified in exercising its powers u/s.254(2) when it was pointed out to the
Tribunal when the original order came to be passed but it had committed a
mistake in not considering the material which was already on record. The
Tribunal has acknowledged its mistake, it has accordingly rectified its order.
According to the Supreme Court, the High Court was not justified in interfering
with the said order.

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Kar Vivad Samadhan Scheme — Though the declaration was originally rejected for the reason that no appeal was pending as the delay was not condoned, the declaration ought to have been subsequently accepted when Tribunal held that there was no delay.

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1 Kar Vivad Samadhan Scheme — Though the
declaration was originally rejected for the reason that no appeal was pending as
the delay was not condoned, the declaration ought to have been subsequently
accepted when Tribunal held that there was no delay.


[Swan Mills Ltd. v. Union of India, (2008) 296 ITR 1
(SC)]

 

The appellant is a composite textile mill engaged in the
manufacture of cotton yarn, man-made yarn, cotton fabrics and man-made fabrics,
as well as processing amongst other activities. For the period from October,
1994 to February, 1997, the appellant was served with 14 show-cause notices for
recovery of differential duty of approximately Rs.50 lakhs. The said show-cause
notices were adjudicated by the Assistant Commissioner of Central Excise,
Mumbai-II vide order-in-original Nos. 781/398/97 to 794/411/97, dated November
12, 1997, confirming the demands covered thereunder along with interest. The
Assistant Commissioner of Central Excise also imposed penalty of Rs.5,000. There
being incorrect computation, he directed the Range Superintendent to verify
figures and work out a fresh demand. The Range Superintendent re-worked the duty
amount of Rs.9,40,753 and issued a demand notice on May 18, 1998, requiring the
appellant to pay the said amount along with penalty of Rs.5,000. Dissatisfied
with the order dated November 12, 1997, passed by the Assistant Commissioner of
Central Excise and the order of Range Superintendent, dated May 18, 1998, the
appellant preferred an appeal before the Commissioner of Central Excise
(Appeals) on September 2, 1998, along with a stay application. The Commissioner
of Central Excise (Appeals), vide order dated December 28, 1998, asked the
appellant to deposit the amount of duty and penalty within four weeks from the
date of the order. The Finance (No. 2) Act, 1998 came out with a scheme known as
‘Kar Vivad Samadhan Scheme, 1998’ (for short ‘KVSS’). The said scheme provided
for settling the tax arrears by paying 50 per cent of the disputed tax arrears.
Under the KVSS, the Commissioner of Central Excise was appointed as designated
authority. The scheme was operative from September 1, 1998, to January 31, 1999.
The appellant filed a declaration u/s.89 of the Finance (No. 2) Act, 1998,
before the Commissioner of Central Excise on December 31, 1998. The aforesaid
declaration filed by the appellant came to be rejected by the designated
authority, vide his order dated February 25, 1999, on the ground that the appeal
was filed by the appellant before the Commissioner of Central Excise (Appeals)
after the limitation for filing the appeal had already expired and that delay in
filing the appeal was not condoned by the Commissioner of Central Excise
(Appeals). Aggrieved by the order in appeal dated February 25, 1999, the
appellant preferred an appeal before the Customs, Excise and Gold (Control)
Appellate Tribunal, West Regional Bench, Mumbai (for short, ‘the Tribunal’). The
Tribunal vide its order dated November 29, 1999, held that the appeal preferred
by the appellant before the Commissioner (Appeals) was within time and,
accordingly, set aside the order of the Commissioner (Appeals) and remanded the
matter back to him for fresh disposal in accordance with law. On remand, the
Commissioner (Appeals) vide order dated June 29, 2001, upheld the order dated
November 12, 1997. After the Tribunal passed by the order on November 29, 1999,
holding that the appeal preferred by the appellant before the Commissioner
(Appeals) was within time, the appellant approached the designed authority, vide
its letter dated April 24, 2001, for reconsideration of the earlier order dated
February 25, 1999, and give the appellant the benefit of the KVSS in the matter
of the application filed u/s.89 of the KVSS on January 28, 1999. The
Superintendent of Central Excise, Range-II, on January 18, 2002, informed the
appellant that the application u/s.89 of the KVSS was re-examined by the Chief
Commissioner’s Office, Mumbai, and since the KVSS no longer exists, the question
of accepting the application does not arise. The appellant approached the Bombay
High Court by filing a writ petition. The appellant challenged principally the
order dated February 25, 1999, passed by the designated authority. It prayed for
direction to the respondents to accept the appellant’s declaration dated
December 31, 1998, made u/s.89 of the Finance (No. 2) Act, 1998, in respect of
the KVSS and restrain the respondents from recovery of interest amount of
Rs.11,58,647 as per the demand dated December 7, 2005. Analysing the various
provisions of the KVSS, the High Court held that since the appeal was filed
after the limitation and the delay was not condoned, the appellant was not
entitled to get the benefit of KVSS. On appeal the Supreme Court held that
undisputedly, the Tribunal had held that the appeal was within time. That being
so, for the purpose of the KVSS, the appeal was to be treated as pending. The
ratio in CIT v. Shatrusailya Digvijaysingh Jadeja, (2005) 7 SCC 294, was
clearly applicable. In the instant case, the appeal is to be treated as pending.
The High Court was not justified in dismissing the writ petition. The Supreme
Court set aside the order of the High Court and quashed the orders of the
designated authority, rejecting the declaration filed by the appellant.

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Companies — MAT — Provision for bad and doubtful debts is not for meeting liability and cannot be added back in computing ‘book profits’ under Section 115JA(2)(c).

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10.  Companies — MAT — Provision for bad and doubtful
debts is not for meeting liability and cannot be added back in computing ‘book
profits’ under Section 115JA(2)(c).


 

[CIT vs. HCL Comnet Systems and Services Ltd.,
(2008) 305 ITR 409 (SC)].

The assessee-company was engaged in trading in data
communication equipment and satellite communication services. During the
course of assessment proceedings, the Assessing Officer found that the
assessee had debited an amount of Rs.92,15,187 on account of bad debts to the
profit and loss account. However, on the ground that it was a provision for
bad and doubtful debts, the Assessing Officer added the aforestated amount to
the book profits as per Explanation (c) to Section 115JA of the Act.

On appeal, the Commissioner of Income-tax (Appeals) allowed
the assessee’s appeal. That decision of the Commissioner of Income-tax
(Appeals) stood affirmed by the Tribunal and also by the High Court.

On further appeal by the Revenue, the Supreme Court held
that the Assessing Officer does not have the jurisdiction to go beyond the net
profit shown in the profit and loss account except to the extent provided in
the Explanation. The Assessing Officer has to make adjustment permissible
under the Explanation given in Section 115JA of the 1961 Act.

The said Explanation has provided six items, viz.,
item Nos. (a) to (f), which if debited to the profit and loss account can be
added back to the net profit for computing the book profit.

Item (c) deals with amount(s) set aside as provision made
for meeting liabilities, other than ascertained liabilities. The assessee’s
case would, therefore, fall within the ambit of item (c) only if the amount is
set aside as provision; the provision is made for meeting a liability; and the
provision should be for other than an ascertained liability, i.e., it
should be for an unascertained liability. The Supreme Court observed that
there are two types of ‘debt’. A debt payable by the assessee is different
from a debt receivable by the assessee. A debt is payable by the assessee
where the assessee has to pay the amount to others, whereas the debt
receivable by the assessee is an amount which the assessee has to receive from
others. In the present case, the ‘debt’ under consideration was a ‘debt
receivable’ by the assessee. The provision for bad and doubtful debt,
therefore, is made to cover up the probable diminution in the value of the
asset, i.e., debt which is an amount receivable by the assessee.
Therefore, such a provision cannot be said to be a provision for a liability,
because even if a debt is not recoverable, no liability could be fastened upon
the assessee. In the present case, the debt is the amount receivable by the
assessee and not any liability payable by the assessee and, therefore, any
provision made towards irrecoverability of the debt cannot be said to be a
provision for liability. The Supreme Court therefore was of the view that item
(c) of the Explanation was not attracted to the facts of the present case. In
the circumstances, the Assessing Officer was not justified in adding back the
provision for doubtful debts of Rs.92,15,187 under clause (c) of the
Explanation to Section 115JA of the 1961 Act.

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Export Business — Deduction U/s. 80 HHC — For the Assessment Year 1990-91, Section 80 HHC(3) statutorily fixes the quantum of deduction on the basis of proportion of business profits under the head ‘Profits and gains of business or profession’, irrespecti

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9.  Export Business — Deduction U/s. 80 HHC — For the
Assessment Year 1990-91, Section 80 HHC(3) statutorily fixes the quantum of
deduction on the basis of proportion of business profits under the head ‘Profits
and gains of business or profession’, irrespective of what could strictly be
described as profits derived from export of goods out of India.


 

[Modyset P. Ltd. vs. CIT (2008) 305 ITR 276 (SC)].

The asessee, a limited company, purchased 105 computers for
Rs.90,91,063. It exported them and realised export sales of Rs.90,91,063.
There was no export profit during the relevant assessment year 1990-91. The
Income-tax Officer allowed the claim of deduction under Section 80HHC at
Rs.15,81,389 as the total business income of the assessee stood at
Rs.55,31,941 by applying the ratio in terms of Section 80HH(3)(b) as follows :

Export Profits = 90,91,063 x 55,31,941

3,18,01,941

The Commissioner of Income-tax revised the aforesaid
assessment order in exercise of his powers under Section 263 denying the
deduction under Section 80 HHC, holding that Section 80 HHC confers the
benefit only on those assessees who have not only carried on the export
business, but who have also derived profits on such business. On an appeal,
the Tribunal allowed the assessee’s appeal following the decision of its Delhi
Special Bench in International Research Park Laboratories Ltd. vs. Asst.
CIT [(1995) 212 ITR (AT) 1], in which it was held that profits need not be
earned in the export business alone to claim special deduction under Section
80 HHC. On a reference by the Revenue, the Karnataka High Court following the
decision of the Supreme Court in Ipca Laboratory Ltd. vs. Dy CIT
[(2004) 266 ITR 521] held that since the assessee had not earned profits from
export sales during the year in question, the assessee was not entitled for
deduction under Section 80 HHC. On an appeal to the Supreme Court by the
assessee, it was held that the eligibility for deduction is contemplated by
Section 80 HHC(1), whereas the quantum of deduction is determined under
Section 80 HHC(3). In the matter of determining the quantum of deduction, the
‘principle of proportionality’ applied. There are two situations which are
covered by Section 80HHC (3), namely, turnover only from export sales and
secondly turnover from composite sales (domestic and export business). In both
cases the formula applied as under :

Section 80 HHC concession = export profit =

Profits of business x Export turnover

Total turnover

The Supreme Court on facts held that the calculation had
been correctly done by the Income-tax Officer. The Supreme Court further held
that the High Court had erred in relying upon the judgment in case of Ipaca
Laboratories Ltd., inasmuch as the provisions as applicable in that case were
for the assessment year 1996-97 which were different from the provisions for
the assessment year 1990-91 with which it was concerned and that for the
relevant assessment year the CBDT Circular No. 564 indicated that Section
80HHC (3) statutorily fixes the quantum of deduction on the basis of a
proportion of business profits under the head ‘Profits and gains of business
or profession’, irrespective of what could strictly be described as profits
derived from export of goods out of India. According to the Supreme Court, the
Circular supported its above reasoning. The Supreme Court however, clarified
that the above reasoning was strictly applicable to the law as it stood during
the relevant assessment year.

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Rectification — Mistake apparent from record — Failure to apply judgment of jurisdictional High Court is a mistake apparent from record.

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8. Rectification — Mistake apparent from record — Failure
to apply judgment of jurisdictional High Court is a mistake apparent from
record.


    [ACIT vs. Saurashtra Kutch Stock Exchange Ltd., (2008) 305 ITR 227 (SC)].

    The assessee, Saurashtra Kutch Stock Exchange Ltd., a company registered under Section 25 of the Act made an application on 10-02-1992 for registration under Section 12A of the Act. The assessee filed its return of income for the assessment year 1996-97, declaring nil income claiming exemption u/s. 11 of the Act, though it had not been registered u/s. 12A of the Act. The return was processed u/s. 143(1)(a) of the Act. On 07-11-1997 a notice was issued to the assessee u/s. 154 to show cause why the exemption granted u/s. 11 should not be withdrawn. In reply it was stated that as it had made an application for registration it was entitled to exemption u/s.11 of the Act. Meanwhile, the CIT on 20-02-1998 granted registration to the assessee on condition that the eligibility regarding exemption u/s. 11 of the Act would be examined by the A. O. for the each assessment year. In an order dated 03-12-1999 passed u/s. 143(3) of the Act, the A. O. rejected the claim of exemption u/s. 11 of the Act. The CIT(A) rejected the appeal of the assessee. The Tribunal also dismissed the appeal of the assessee. The assessee filed a miscellaneous application u/s. 254(2) of the Act to rectify the error committed by the Tribunal in the decision rendered by it in appeal. The Tribunal allowed the miscellaneous application and recalled its earlier order passed in appeal. For allowing the application, the Tribunal relied upon the decision of the jurisdictional High Court.

    Dissatisfied with the order passed by the Tribunal in miscellaneous application, the Revenue filed a writ petition which was dismissed by the High Court. On an appeal, the Supreme Court first considered as to what is a mistake apparent from record. After noting the precedent, the Supreme Court held that a patent, manifest and self-evident error which does not require elaborate discussion of evidence or argument to establish it, can be said to be an error apparent on the face of the record and can be corrected while exercising certiorari jurisdiction. An error cannot be said to be apparent on the face of the record if one has to travel beyond the record to see whether the judgment is correct or not. An error apparent on the face of the record means an error which strikes on mere looking and does not need a long drawn out process of reasoning on points where there may conceivably be two opinions. Such error should not require any extraneous matter to show its incorrectness. To put it differently, it should be so manifest and clear that no Court would permit it to remain on record. If the view accepted by the Court in the original judgment is one of possible views, the case cannot be said to be covered by an error apparent on the face of the record.

    The Supreme Court thereafter considered as to whether non-consideration of a decision of a jurisdictional Court or of the Supreme Court can be said to be a mistake apparent from record.

    The Supreme Court held that it was well settled that a judicial decision acts retrospectively. Accordingly to Blackstonian theory, it is not the function of the Court to pronounce a ‘new rule’, but to maintain and expound the ‘old one’. In other words, Judges do not make law, they only discover or find the correct law. The law has always been the same. If a subsequent decision alters the earlier one, it (the latest decision) does not make new law. It only discovers the correct principle of law which has to be applied retrospectively. To put it differently, even where an earlier decision of the Court operated for quite some time, the decision rendered later on would have retrospective effect clarifying the legal position which was earlier not correctly understood.

    The Supreme Court held that in the present case, according to the assessee, the Tribunal decided the matter on October 27, 2000. Hiralal Bhagwati was decided a few months prior to that decision by the jurisdictional High Court, in which it was held that a trust could claim exemption under Section 11, but it was not brought to the attention of the Tribunal. In the circumstances, the Tribunal had not committed any error of law or of jurisdiction in exercising power under sub-Section (2) of Section 254 of the Act and in rectifying the ‘mistake apparent from the record’. Since no error was committed by the Tribunal in rectifying the mistake, the High Court was not wrong in confirming the said order. Both the orders, therefore, in the opinion of the Supreme Court, were strictly in consonance with law and no interference was called for.

Business expenditure — Interest expenditure — Matter remanded to the High Court to determine whether the transactions were entered into with the idea of evading tax.

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26. Business expenditure — Interest expenditure — Matter
remanded to the High Court to determine whether the transactions were entered
into with the idea of evading tax.

[CIT v. Ashini Lease Finance P. Ltd., (2009) 309 ITR
320 (SC)].

The Assessing Officer for the A.Y.s 1996-97 and 1997-98
found that borrowed funds were invested to acquire control of AEC.
Accordingly, he disallowed the interest expenses u/s.36(1)(iii). This was on
the footing that the assessee had paid interest to Torrent Financiers and
Torrent Leasing and Finance Private Limited (sister companies of the assessee).
According to the order of assessment, the borrowed funds were deployed by the
assessee-company during the relevant year in order to purchase equity shares
of AEC, which company was subsequently taken over not by the assessee but by
the Torrent group. During the relevant year, the total investment made by the
assessee in the takeover and acquisition of business of AEC amounted to only
Rs.22,59,969. The Assessing Officer detected that after acquiring the shares
of AEC Ltd. the assessee sold the shares of AEC at Rs.63,57,925 and further
that subsequently, the said AEC Ltd. had been taken over and acquired by the
Torrent group. The record indicated, prima facie, that the assessee-company
had acquired the shares of AEC through finances arranged mainly from the
Torrent group (sister companies) along with two other companies, only to
enable the Torrent group to acquire and take over the business of AEC.

The Commissioner of Income-tax (Appeals) as well as the
Tribunal both however found that the borrowings were for the purposes of
business. The question, therefore, which arose for consideration before the
High Court was: Whether the assessee was entitled to deduction in respect of
interest paid by it to the Torrent group? The High Court held that whether the
borrowings were for the purpose of business or not, was basically based on the
finding of fact. The High Court held that considering the concurrent finding
of fact, there was no perversity in the order. On an appeal the Supreme Court
held that prima facie, it appeared that the High Court had lost sight
of the facts which, if proved and established, indicate circular trading was
entered into solely with the idea of evading tax. The Supreme Court expressed
the prima facie view only in support of its order as relevant aspects
had not been considered by the Tribunal and, observed that the above reasons
should not be taken as its conclusion. Therefore, according to the Supreme
Court the High Court had erred in dismissing the appeals on the ground that no
substantial question of law arose for determination.

The Supreme Court set aside the judgment of the High Court
and restored tax appeals to the file of the High Court with a direction to the
High Court to dispose of these appeals in accordance with law.

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Industrial undertaking — In order to constitute an industrial undertaking the important criteria to be applied is to identify the item in question, the process undertaken by it and the resultant output

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25. Industrial undertaking — In order to constitute an
industrial undertaking the important criteria to be applied is to identify the
item in question, the process undertaken by it and the resultant output — Matter
remanded to Tribunal in the absence of details of activities of a hospital.

[Down Town Hospital Ltd. v. CIT, (2009) 308 ITR 188
(SC)]

The appellant-assessee, a hospital, had made investment in
plant and machinery. It operated a nursing home in Guwahati. The assessee
claimed deduction u/s.80HH for the A.Y. 1994-95. The Assessing Officer (AO)
held that the assessee was not an industrial undertaking. It was, therefore,
not eligible for deduction and, consequently, the assessee’s claim for
deduction stood disallowed.


Aggrieved by the said order the matter was carried in
appeal to the Commissioner (Appeals). The Commissioner (Appeals) allowed the
relief following his earlier decision for A.Y. 1993-94, that the assessee was
an industrial undertaking. On appeal the Tribunal held that in view of two
decisions of two separate High Courts, namely, the Rajasthan High Court [CIT
v. Trinity Hospital, (1997) 225 ITR 178 (Raj.)] and the Kerala High Court
[CIT v. Upasana Hospital, (1997) 225 ITR 845 (Ker)] the assessee-hospital
was an industrial undertaking entitled to deduction u/s.80HH.


On an appeal by the Department, the Guwahati High Court
(251 ITR 683) held that in the absence of any materials to show that the
activities carried on in the Hospital or nursing home amounted to manufacture
or production of any article or thing, the assessee was not entitled to relief
u/s.80HH and u/s.80I.


On an appeal, the Supreme Court held that in order to
constitute an industrial undertaking, u/s.32A or u/s.80HH, the important
criteria to be applied by the Assessing Officer is to identify the item in
question, the process undertaken by it and the resultant output. For example,
if the item is a data processing machine/computer, the question as to whether
the printout from that computer is as a result of manufacture is one of the
tests to be applied in judging whether the undertaking which buys this article
is an industrial undertaking or not. Unfortunately, in the present case there
was no identification of the items installed in the hospital by the Tribunal
and, therefore, it was not possible for it to express any opinion as to
whether the assessee was entitled to deduction u/s.80HH of the Income-tax Act.


The impugned order of the Guwahati High Court was set aside
therefore, by the Supreme Court, and the matter was remitted to the Tribunal
for deciding the case de novo in accordance with law.



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Appeals — Revenue cannot file an appeal involving a dispute for which no appeal is filed for earlier years if there is no change in the fact situation.

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24. Appeals — Revenue cannot file an appeal involving a
dispute for which no appeal is filed for earlier years if there is no change in
the fact situation.

[CIT v. J. K. Charitable Trust, (2009) 308 ITR 161
(SC)]

The challenge in the appeals in each case before the
Supreme Court was to the order passed by a Division Bench of the Allahabad
High Court answering the reference made by the Income-tax Appellate Tribunal,
Allahabad Bench (in short ‘the ITAT’) u/s.256(1) of the Income-tax Act, 1961
(in short ‘the Act’) in favour of the assessee and against the Revenue. For
answering the references in favour of the assessee, the High Court relied upon
its judgment for two previous assessment years, i.e., 1972-73 and
1973-74 in the assessee’s case which is reported in CIT v. J. K. Charitable
Trust, (1992) 196 ITR 31. The present dispute relates to several
assessment years i.e., 1972-73 (in respect of an assessment reopened
u/s.147(1) of the Act) and the A.Y.s 1975-76 to 1982-83.


Learned counsel for the Revenue-appellant submitted before
the Supreme Court that each assessment year is a separate assessment unit and
the factual scenario had to be seen. The dispute related to the question
whether the respondent-assessee’s trust was hit by the provisions of S.
13(1)(c) and S. 13(2)(a)(f) and (h) of the Act and, therefore, could not be
given the benefit of exemption provided u/s.11 of the Act.


Learned counsel for the assessee submitted before the
Supreme Court that for several years no appeal had been filed even though the
factual position was the same, i.e., for the A.Y. 1983-84 up to the A.Y.
2007-08. No appeal was filed even against the decision reported in CIT v.
J. K. Charitable Trust, (1992) 196 ITR 31. It was also pointed out that
several other High Courts had taken a similar view and no appeal was preferred
by the Revenue against any of the judgments of the different High Courts.
Reference is made to the decisions reported in CIT v. Trustees of the Jadi
Trust, (1982) 133 ITR 494 (Bom.), CIT v. Hindusthan Charity Trust,
(1983) 139 ITR 913 (Cal.), CIT v. Sarladevi Sarabhai Trust, (No. 2)
(1988) 172 ITR 698 (Guj.) and CIT v. Nirmala Bakubhai Foundation,
[1997] 226 ITR 394 (Guj).


Learned counsel for the Revenue submitted that even though
appeal had not been preferred in respect of some assessment years, that did
not create a bar for the Revenue filing an appeal for other assessment years.


Reliance was placed on a decision of the Supreme Court in
C. K. Gangadharan v. CIT, (2008) 304 ITR 61.


The Supreme Court noted that the factual scenario was
undisputed that for a large number of assessment years no appeal had been
filed. The basic question, therefore, was whether the Revenue could be
precluded from filing an appeal even though in respect of some other years
involving identical dispute no appeal was filed.


The Supreme Court observed that in this case, it was
accepted by the learned counsel for the appellant-Revenue that the fact
situation in all the assessment years was the same. According to him, if the
fact situation changes, then the Revenue could certainly prefer an appeal
notwithstanding the fact that for some years no appeal was preferred. The
question was of academic interest in the present appeals as undisputedly the
fact situation was the same. The Supreme Court therefore held that the appeals
were without merit and were accordingly dismissed.



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Manufacture/Production — Conversion of jumbo rolls of photographic films into small flats and rolls in the desired sizes amounted to manufacture /production of a article or thing.

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23. Manufacture/Production — Conversion of jumbo rolls of
photographic films into small flats and rolls in the desired sizes amounted to
manufacture /production of a article or thing.

[India Cine Agencies v. CIT, (2009) 308 ITR 98(SC)]

In all the appeals before the Supreme Court the common
question that was involved was related to the entitlement of benefit in terms
of S. 32AB, S. 80HH and S. 80-I of the Income-tax Act, 1961 (in short the
‘Act’). In all the cases the issue was the effect of conversion of jumbo rolls
of photographic films into small flats and rolls in the desired sizes. The
assessees’ contention was that the same amounted to manufacture/production, as
the case may be. The stand of the Revenue was that it was not either
manufacture or production. In some cases the High Court held that in any
event, because of item 10 of the Eleventh Schedule, no deduction was
permissible. The High Court decided in favour of the Revenue and, therefore,
the appeals were filed by the assessee before the Supreme Court. The Supreme
Court after referring the dictionary meaning of the words ‘manufacture’ and
‘produce’ and noting the precedents on the subject held that the assessee was
entitled to the allowance u/s.32AB, u/s.80HH and u/s.80I of the Act. The
Supreme Court observed that the matter could yet be looked from another angle.
If there was no manufacturing activity, then the question of referring to item
10 of the Eleventh Schedule for the purpose of exclusion did not arise. The
Eleventh Schedule, which was inserted by the Finance (No. 2) Act, 1977, with
effect from 1-4-1978, has reference to S. 32A, S. 32AB, S. 80CC(3)(a)(i), S.
80-I(2), S. 80J(4) and S. 80A(3)(a)(i) of the Act. The appeals were allowed.

Authors’ Note :

Finance (No. 2) Act, 2009 has introduced definition of the
term ‘manufacture’ in S. 2(29BA) w.e.f. 1.4.09.

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Search — Levy of surcharge on block assessment — Surcharge is leviable even to cases relating to assessment years prior to the insertion of S. 113.

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7. Search — Levy of surcharge on block assessment — Surcharge
is leviable even to cases relating to assessment years prior to the insertion of
S. 113.

[ CIT v. Rajiv Bhatara, (2009) 310 ITR 105 (SC)]

Search was conducted on April 6, 200. The Assessing Officer
in his order dated May 22, 2002, imposed surcharge and an application u/s.154
of the Act filed by the assessee for rectification was dismissed vide order
dated September 17, 2003, with the observation that the surcharge was levied
as per the provisions of Part I of the First Schedule appended to the Finance
Act, 2000. However, the Commissioner of Income Tax (Appeals), Ludhiana, [for
brevity ‘the CIT(A)’] reversed the order passed by the Assessing Officer and
took the view that surcharge was not leviable in cases where the search had
taken place prior to June 1, 2002. In that regard, reliance was placed on a
Division Bench judgment of the Punjab and Haryana High Court in the case of
CIT v. Ram Lal Babu Lal, 234 ITR 776. On further appeal by the Revenue the
Tribunal upheld the order dated September 12, 2005, passed by the Commissioner
of Income-tax (Appeals) holding that the search in the present case took place
on April 6, 2000, which was much prior to the date of amendment made in S.
113. The amendment was incorporated on June 1, 2002, by inserting a proviso to
S. 113 by the Finance Act, 2002. It was by the amendment that the levy of
surcharge on the undisclosed income was specifically provided with effect from
June 1, 2002. The provision has not been given retrospective effect, and
therefore, the Tribunal held that it applied only to cases where searches were
carried out after June 1, 2002. The High Court dismissed the appeal relying on
its decision in the case of CIT v. Roshan Singh Makkar, (2006) 287 ITR
160 (P&H) and also referred to two other decisions of the Madras High Court in
CIT v. Neotech Company, (Firm) (2007) 291 ITR 27 and CIT v. S.
Palanivel, (2007) 291 ITR 33.

On an appeal before the Supreme Court, the learned counsel
for the appellant (Revenue) submitted that the case at hand was squarely
covered by a decision of the Supreme Court in CIT v. Suresh N. Gupta,
(2008) 297 ITR 322.

According to the appellant, prior to June 1, 2002, the
position was ambiguous as it was not clear even to the Department as to
whether surcharge was levied with reference to the rates provided for in the
Finance Act of the year in which the search was initiated or the year in which
the search was concluded or the year in which the block assessment proceedings
u/s.158C were initiated or the year in which block assessment order was
passed. The Supreme Court held that to clear that doubt precisely, the proviso
was inserted in S. 113 by which it is indicated that the Finance Act of the
year in which the search was initiated would apply. Therefore, the proviso to
S. 113 was clarificatory in nature. It only clarifies that out of the four
dates, Parliament has opted for the date, namely, the year in which the search
was initiated, which date would be relevant for applicability of a particular
Finance Act. The above position was highlighted in Suresh N. Gupta’s case. The
Supreme Court therefore allowed the appeal of the revenue.

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Substantial Question of Law — Cancellation of penalty on the ground that the benefit under the amnesty scheme was available to the assessee even though there was material to show that the return was not voluntary gives rise to a substantial question of la

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5. Substantial Question of Law — Cancellation of penalty on
the ground that the benefit under the amnesty scheme was available to the
assessee even though there was material to show that the return was not
voluntary gives rise to a substantial question of law.

[CIT v. C. A. Taktawala, (2009) 309 ITR 340 (SC)]

The Supreme Court held that the High Court had erred in not
answering the following question, which in its opinion was a substantial
question of law.

“Whether, on the facts and circumstances of the case, the
Tribunal was right in law and on facts in cancelling the penalty levied
u/s.271(1)(a) and u/s.273(2)(a) of the Income-tax-Act on the ground that the
benefit under the amnesty scheme was available to the assessee, particularly
when subsequent to search operation, the assessee itself had revised its
returns on a number of occasions, which would go to show that the return was
not voluntary”.

 

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Substantial Question of Law — Whether on conversion of a partnership firm into a company under Part IX of the Companies Act the revaluation of the depreciable assets prior to conversion would be liable to capital gain tax is a question of law.

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6. Substantial Question of Law — Whether on conversion of a
partnership firm into a company under Part IX of the Companies Act the
revaluation of the depreciable assets prior to conversion would be liable to
capital gain tax is a question of law.

[CIT v. Well Pack Packaging, (2009) 309
ITR 338 (SC)]

The respondent-assessee was a partnership firm.
On August 30, 1995, it filed its original return of income in respect of the
A.Y. 1995-96 declaring a total income of Rs.1,93,930. The said return was
processed u/s.143(1)(a) of the Income-tax Act, 1961 (for short, ‘the Act’), on
January 29, 1996. Subsequently, the Assessing Officer noticed that the
assessee had revalued the depreciable assets and enhanced the value at
Rs.1,28,13,831 on July 31, 1994. It was also noticed by him that the
partnership firm was converted into a company under Part IX of the Companies
Act, 1956, and was registered as such u/s.567 of the said Act on October 17,
1994. Therefore, proceedings u/s.148 of the Act for reassessment were
initiated. After considering the explanation of the respondent, the Assessing
Officer determined the total income of the respondent at Rs.1,30,07,761. The
Assessing Officer made an addition of capital gains of Rs.1,28,13,831 on
account of transfer of the depreciable assets at enhanced value on conversion
to company under Part IX of the Companies Act , which was a separate entity.
The Commissioner (Appeals) dismissed the appeal. The Tribunal allowed the
appeal and set aside the orders of the Commissioner (Appeals) and the
Assessing Officer.

Before the High the following four questions of
law were said to be arising from the order of the Tribunal :

“(1) Whether the Income-tax Appellate Tribunal
is right in law and on the facts of the case in holding that revaluation of
the assets of the assessee-firm and subsequent conversion of the firm into
limited company under Part IX of the Companies Act which has taken over such
assets at the enhanced value will not result into any capital gains
liability under the Income-tax Act ?

(2) Whether the Income-tax Appellate Tribunal
is right in law and on the facts of the case in holding that there is no
transfer involved when the assessee gets itself registered under Part IX of
the Companies Act, 1956 ?

(3) Whether the Income-tax Appellate Tribunal
is right in law and on facts of the case in holding that the assessee is not
liable to any capital gains tax either u/s.45(1) or u/s.45(4) of the
Income-tax Act ?

(4) Whether the Income-tax Appellate Tribunal
is right in law and on the facts of the case in directing to delete the
addition of Rs.1,28,13,831 ?”

The High Court, by the impugned order, dismissed
the appeal by passing a short order observing, that no question of law much
less a substantial question of law arose from the order of the Tribunal.

On an appeal, the Supreme Court held that it did
not agree with the view taken by the High Court. In its opinion, the questions
of law as raised by the Revenue before the High Court were substantial
questions of law which arose from the order of the Tribunal.

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Export business — Deduction u/s.80HHC — If the assessee is a supporting manufacturer, on producing disclaimer certificates from export house, he would be entitled to claim the benefit u/s.80HHC.

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3. Export business — Deduction u/s.80HHC — If the assessee is
a supporting manufacturer, on producing disclaimer certificates from export
house, he would be entitled to claim the benefit u/s.80HHC.

[Janatha Cashew Exporting Co. v. CIT, (2009) 309 ITR
440 (SC)]

The assessee, a cashew exporter, had made direct and
indirect exports for the A.Y. 1992-93 and had claimed total deduction of an
amount of Rs.97,54,515 u/s.80HHC(1) and S. 80HHC(1A) of the Income-tax Act.
The Assessing Officer granted deduction u/s.80HHC(1) and u/s.80HHC(1A) in
respect of direct and indirect exports in all amounting to Rs.91,10,306 as
against the claim of Rs.96,54,515. However, while granting deduction under the
proviso to S. 80HHC(3) the Assessing Officer excluded sales to export houses
from the export turnover and he re-worked the relief at Rs.12,63,532.
Aggrieved by the said order the assessee took up the matter before the
Commissioner of Income-tax (Appeals). The order of the Assessing Officer was
upheld on the ground that export turnover included only direct exports since
S. 80HHC(3) dealt with quantification of deduction in case of direct exports
and the quantum of deduction had to be computed only on the basis of direct
export turnover. The Commissioner of Income-tax (Appeals) also took note of
the deduction separately granted on indirect exports u/s.80HHC(1A) of the Act.
However, when the assessee carried the matter in appeal to the Tribunal it
took the view that, the Assessing Officer should compute the income of the
assessee and allow benefits admissible to the export house if such export
house had issued a disclaimer certificate. Aggrieved by the said decision the
Department moved the High Court by way of appeal u/s.260A of the Income-tax
Act. The decision of the Tribunal was, however, set aside by the High Court
which took the view that since S. 80HHC(1) read with S. 80HHC(3) provided for
computation and deduction of profit on direct exports only and the assessee
was not entitled to the benefit in that regard qua indirect exports made
through the export house. The High Court also proceeded on the basis that the
sales turnover from sales effected by the assessee to the export houses did
not answer the description of export turnover and, therefore, the assessee was
not entitled to take the indirect exports into account while calculating sales
turnover in the formula mentioned in S. 80HHC(3).

On an appeal, the Supreme Court held that the matter needed
to be remitted to the Assessing Officer. Firstly, because in this case, there
was no factual finding recorded by the High Court as to whether the sales made
through the export houses by the assessee were supported by a disclaimer
certificate from such export houses. According to the Supreme Court, under the
provisions of S. 80HHC(3), if the assessee is a supporting manufacturer, on
his producing such disclaimer certificate the assessee would be entitled to
claim the benefit of deduction under the said section. Secondly, fresh
computation was now required to be done in view of three subsequent judgments,
in the case of CIT v. K. Ravindranath Nair, (295 ITR 228) A. M. Mosa
v. CIT, (294 ITR 1) and Lalsons v. Dy. CIT, (89 ITD 25).

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Appellate Tribunal — Scope of powers — The Tribunal is not authorised to take back the benefit granted to the assessee by the Assessing Officer — The Tribunal has no power to enhance the assessment.

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4. Appellate Tribunal — Scope of powers — The Tribunal is not
authorised to take back the benefit granted to the assessee by the Assessing
Officer — The Tribunal has no power to enhance the assessment.

Lease transaction if found to be sham, depreciation cannot
be allowed — Alternative argument that only interest component be treated as
income rejected.

[M. Corpn. Global P. Ltd. v. CIT, (2009) 309 ITR 434
(SC)]

During the relevant assessment year 1991-92, the assessee
carried on the business of trading in lamination machines and binding and
punching machines. In addition, it was engaged in the leasing business. During
the year in question, the assessee had bought 5,46,000 soft drink bottles from
M/s. Glass and Ceramic Decorators worth Rs.19,54,953. The bottles were
directly supplied to M/s. Coolade Beverages Pvt. Ltd. (‘M/s. Coolade’ for
short) in terms of lease dated February 15, 1991. Vide assessment order dated
March 28, 1994, the Assessing Officer found that M/s. Coolade had received
only 42,000 bottles out of the total of 5,46,000 bottles receivable by them
from the assessee and that the remaining bottles stood received after March
31, 1991, i.e., between the period April 3, 1991, and April 18, 1991,
and, consequently, the Assessing Officer restricted the depreciation only to
42,000 bottles and consequently disallowed the depreciation of Rs.18,04,572.
In appeal the Commissioner of Income-tax (Appeals) after formulating the ‘user
test’ remanded the matter to the Assessing Officer who on remand held that all
5,46,000 bottles stood paid for and dispatched before March 31, 1991, and
therefore, the assessee was entitled to 100% depreciation on all 5,46,000
bottles. This finding was given when the appeal was pending before the Income
Tax Appellate Tribunal. The said finding of the Assessing Officer (on remand)
was not challenged. However, when the appeal came before the Tribunal, it was
held that since the lease was not renewed and since the bottles were not
returned on expiry the transaction in question was only a financial
arrangement and not a lease, hence, the Income Tax Appellate Tribunal
disallowed the depreciation claim of the assessee which finding stood
confirmed by the High Court.

On an appeal, the Supreme Court held that in the case of
Hukumchand Mills Ltd. v. CIT, reported in (1967) 63 ITR 232 it had held
that u/s.33(4) of the Income-tax Act, 1922 (equivalent to S. 254(1) of the
1961 Act), the Tribunal was not authorised to take back the benefit granted to
the assessee by the Assessing Officer. The Tribunal has no power to enhance
the assessment. Applying the ratio of the said judgment to the present case,
the Supreme Court was of the view that, in this case, the Assessing Officer
had granted depreciation in respect of 42,000 bottles out of the total number
of bottles (5,46,000). By reason of the impugned judgment of the High Court
that benefit was sought to be taken away by the Department, which was not
permissible in law. This was the infirmity in the impugned judgment of the
High Court and the Tribunal. There was one more aspect which attracted the
attention of the Supreme Court. It observed that, according to the impugned
judgment of the High Court and the Tribunal, the transaction dated February
15, 1991, was a financial transaction and not a lease. If depreciation is to
be granted for 42,000 bottles under the transaction dated February 15, 1991,
then it cannot be said that 42,000 bottles came within the lease dated
February 15, 1991, and the balance came within the so-called financial
arrangement. In the circumstances, the Supreme Court held that the benefit of
depreciation given to the assessee by the Assessing Officer in respect of
42,000 bottles out of 5,46,000 bottles could not be withdrawn by the
Department and for that reason alone the assessee should succeed in the civil
appeal. The Supreme Court further observed that, in this case the Commissioner
of Income-tax (Appeals) had remitted the matter to the Assessing Officer who
on remand came to the conclusion that all 5,46,000 bottles stood sold before
March 31, 1991. This finding of fact had become final. It had not been
challenged. Hence, the Department had erred in disallowing the depreciation of
Rs.18,04,572.

Another lease transaction was also the subject matter of
the appeal. On March 15, 1991, lease was executed between the assessee as
lessor and M/s. Aravali Leasing as lessee whereas there was a sub-lease
between M/s. Aravali Leasing and M/s. Unikol Bottles dated March 8, 1991. The
Assessing Officer came to the conclusion that the transaction dated March 15,
1991, was not proved. It was a sham. Accordingly, the Assessing Officer
disallowed the depreciation amounting to Rs.30,17,122. This finding has been
accepted by the Tribunal and the High Court. The Supreme Court found no
infirmity in the concurrent findings of fact recorded by the authorities
below. The Supreme Court also rejected the alternative submission made on
behalf of the assessee that, if the said transaction was a financial
arrangement, as held by the Department even then the assessee could be taxed
only on interest embedded in the amount of lease rental received from the
lessee on the ground that the transaction was not proved by the assessee.


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Export business — Deduction u/s.80HHC (prior to 1989) — Deduction only to the extent it is covered by the reserve created for the said reserve.

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2. Export business — Deduction u/s.80HHC (prior to 1989) —
Deduction only to the extent it is covered by the reserve created for the said
reserve.

[Parekh Brothers v. CIT, (2009) 309 ITR 446 (SC)]

The Supreme Court dismissed the appeal from the decision of
the Kerala High Court to the effect that, where the reserve created for the
purpose of the special deduction u/s.80HHC of the Income-tax Act, 1961, is of
a lesser amount then deduction would be allowed only of the lesser sum
supported by the creation of the reserve.

 

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Substantial Question of Law — Applicability of S. 35AB — For applicability of S. 35AB, the nature of expenditure is required to be decided at the threshold because if the expenditure is found to be revenue in nature, then S. 35AB may not apply — However,

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1. Substantial Question of Law — Applicability of S. 35AB —
For applicability of S. 35AB, the nature of expenditure is required to be
decided at the threshold because if the expenditure is found to be revenue in
nature, then S. 35AB may not apply — However, if it is found to be capital in
nature, the question of amortisation and spread over, as contemplated by S. 35AB
would come into play.

[CIT v. Swaraj Engines Ltd., (2009) 309 ITR 443
(SC)]

The High Court dismissed the Department’s appeal in limine
following its earlier judgment in the case of CIT v. JCT Electronics Ltd.,
(2008) 301 ITR 290 (P&H) on the following question of law :

“Whether, on the facts and in the circumstances of the
case, the Hon’ble Income-tax Appellate Tribunal is right in upholding the
decision of the Commissioner of Income-tax (Appeals) that the payments of
the royalty made by the assessee company to M/s. Kirloskar Oil Engine Ltd.
to acquire technology know how under the agreement dated October 19, 1989,
is a revenue expenditure and does not come within the ambit of the
provisions of S. 35AB of the Income-tax Act, 1961, whereas the payment is a
capital expenditure in view of the following judgments.

(A) Fenner Woodroffe and Co. Ltd. v. CIT, (1976)
102 ITR 665 (Mad.);

(B) Ram Kumar Pharmaceuticals Works v. CIT, (1979)
119 ITR 33 (All.);

(C) CIT v. Warner Hindusthan Ltd., (1986) 160 ITR
217 (AP); and

(D) CIT v. Southern Switchgear Ltd., (1984) 148
ITR 272 (Mad.).”

On an appeal the Supreme Court noted that, M/s. Swaraj
Engines Ltd. (respondent herein) entered into an agreement of transfer of
technology know-how and trade mark with Kirloskar Oil Engines Ltd. under which
royalty was payable by it. The claim for deduction in respect of the said
payment was made by the respondent. During the relevant A.Y. 1995-96, royalty
was paid by the assessee as a percentage of net selling price of the licensed
goods products.

According to the Supreme Court, two questions arose for its
determination. Firstly, whether the question regarding applicability of S.
35AB of the Income-tax Act, 1961, was ever raised by the Assessing Officer in
this case ? The second question which arose for determination in this case was
whether the expenditure incurred was revenue expenditure or whether it was an
expenditure which was capital in nature and depending on the answer to the
said question, the applicability of S. 35AB of the Income-tax Act needed to be
considered.

The Supreme Court observed that, on the first question,
there was considerable amount of confusion. It appeared that prior to the A.Y.
1995-96, the Department had been contending that the royalty expenditure came
within the ambit of S. 35AB. However, there was some doubt as to whether the
said contention regarding applicability of S. 35AB was at all raised. In this
regard, the order of the Assessing Officer was not clear principally because
it had focussed only on one point, viz., whether such expenditure is
revenue or capital in nature. The Supreme Court held that even for the
applicability of S. 35AB, the nature of expenditure is required to be decided
at the threshold because if the expenditure is found to be revenue in nature,
then S. 35AB may not apply. However if it is found to be capital in nature,
then the question of amortisation and spread over, as contemplated by S. 35AB,
would certainly come into play. Therefore in the view of the Supreme Court, it
was not correct to say that in this case, interpretation of S. 35AB was not in
issue and the above reasoning was further fortified by the question framed by
the High Court.

The Supreme Court therefore held that the said question
needed to be decided authoritatively by the High Court as it was an important
question of law, particularly, after insertion of S. 35AB and therefore,
remitted the matter to the High Court for fresh consideration in accordance
with law.

The Supreme Court did not express any opinion on the second
question observing that it was for the High Court to decide, after construing
the agreement between the parties, whether the expenditure was revenue or
capital in nature and, depending on the answer to that question, the High
Court would have to decide the applicability of S. 35AB of the Income-tax Act.
The Supreme Court kept all contentions on both sides expressly open.

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Search and seizure : Block assessment : S. 158BD of Income-tax Act, 1961 : Documents seized considered for assessment of third person : Notice could not be issued on assessee u/s.158BD.

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Reported :


53 Search and seizure :
Block assessment : S. 158BD of Income-tax Act, 1961 : Documents seized
considered for assessment of third person : Notice could not be issued on
assessee u/s.158BD.

[Superhouse Overseas Ltd.
and Anr. v. Dy. CIT, 325 ITR 448 (All.)]

Search and seizure operation
u/s.132 of the Income-tax Act, 1961 was carried out at the residence of one T. A
diary was seized and proceedings u/s.158BC were initiated in the case of T.
Notices u/s.158BD were issued in the name of the petitioners.

The petitioners filed writ
petitions before the Allahabad High Court and challenged the notices. The
petitioners pointed out to the Court that the material on the basis of which the
notices u/s. 158BD were issued, had been considered by the Settlement Commission
in the case of E, an association of persons and the Settlement Commission had
passed an order u/s.245D(4) of the Act in which on the basis of the diary,
income had been determined and that in pursuance of the order of the Settlement
Commission, the association of persons had duly deposited the tax.

The Allahabad High Court
allowed the writ petitions and held as under :

“Once the diary which was
the basis for the issue of the notices u/s.158BD had been considered in the case
of the association of persons and the income arising thereof had been assessed
in the case of the association of persons, the notices u/s.158BD did not survive
and were liable to be quashed.”

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Revision : S. 263 of Income-tax Act, 1961 Limitation : A.Y. 2004-05 : Reopening of assessment on certain items and reassessment completed : Revision in respect of other items u/s.263 : Period of limitation to be counted from the original assessment.

New Page 2

Reported :

52 Revision : S. 263 of
Income-tax Act, 1961 Limitation : A.Y. 2004-05 : Reopening of assessment on
certain items and reassessment completed : Revision in respect of other items
u/s.263 : Period of limitation to be counted from the original assessment.

[Ashoka Buildcom Ltd. v.
ACIT, 191 Taxman 29 (Bom.)]

For the A.Y. 2004-05 the
original assessment was completed u/s.143(3) of the Income-tax Act, 1961 by an
order dated 27-12-2006. Subsequently the assessment was reopened by issuing a
notice u/s. 148, dated 6-3-2007 on the basis that the benefit u/s.72A had been
wrongly allowed to the assessee. Reassessment was completed by an order u/s.147
dated 27-12-2007 withdrawing the benefit given to the assessee u/s.72A of the
Act. Thereafter, on 30-4-2009 the Commissioner issued notice u/s.263 proposing
to revise the assessment order dated 27-12-2007.

The assessee filed writ
petition and challenged the notice on the ground that what is sought to be
revised is the original assessment order dated 27-12-2006 and not the
reassessment order dated 27-12-2007 and accordingly the notice u/s.263, dated
30-4-2009 is beyond the period of limitation and hence invalid. The Bombay High
Court allowed the petition, quashed the notice and held as under :


“(i) While seeking to
exercise his jurisdiction u/s. 263, the Commissioner did not find any error
in the order of reassessment dated 27-12-2007 as regards the disallowance of
the assessee’s claim on the basis of the provisions of S. 72A. The impugned
notice adverted to issues which, as a matter of fact, did not form either
the subject-matter of the notice that was issued u/s.148 on 6-3-2007, nor
the order of reassessment thereupon which was passed on
27-12-2007. The jurisdiction u/s.263 was sought to be exercised with
reference to issues which were unrelated to the grounds on which the
original assessment was reopened and reassessment was made.

(ii) Ss.(2) of S. 263
stipulates that no order shall be made U/ss.(1) after the expiry of two
years from the end of the financial year in which the order sought to be
revised was passed. That period of two years from the end of the financial
year in which the original order of assessment dated 27-12-2006 was passed,
had expired on 31-3-2009. Hence, the exercise of the revisional jurisdiction
in respect of the original order of reassessment was barred by limitation.

(iii)
Where an assessment has been reopened u/s. 147 in relation to a particular
ground or in relation to certain specified grounds and subsequent to the
passing of the order of reassessment, the jurisdiction u/s.263 is sought to
be exercised with reference to issues which did not form the subject of the
reopening of the assessment or the order of reassessment, the period of
limitation provided for in Ss.(2) of S. 263 would commence from the date of
the order of assessment and not from the date on which the order reopening
the
reassessment has been passed.

(iv) The submission of
the Revenue was that when several issues are dealt with in the original
order of assessment and only one or more of them are dealt with in the order
of reassessment passed after the assessment has been reopened, the remaining
issues must be deemed to have been dealt with in the order of reassessment.
Hence, it had been urged that the omission of the Assessing Officer, while
making an order of reassessment, to deal with those issues u/s. 143(3), read
with S. 147, constituted an error which could be revised in exercise of the
jurisdiction u/s.263. The submission could neither be accepted as a matter
of first principle, based on a plain reading of the provisions of S. 147 and
S. 263, nor was it sustainable in view of the law laid down by the Supreme
Court.

(v) For those reasons,
the exercise of the revisional jurisdiction u/s.263 was barred by
limitation.”



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Reassessment : S. 147 and S. 148 of Income-tax Act, 1961 : A.Y. 1998-99 : AO issuing notice u/s.148 on basis of information given by Dy. Director and directions from Dy. Director and Addl Commissioner : AO not applying his mind : Notice and reassessment p

New Page 2

Reported :

50 Reassessment : S. 147 and
S. 148 of Income-tax Act, 1961 : A.Y. 1998-99 : AO issuing notice u/s.148 on
basis of information given by Dy. Director and directions from Dy. Director and
Addl Commissioner : AO not applying his mind : Notice and reassessment
proceedings not valid.

[CIT v. SFIL Stock
Broking Ltd., 325 ITR 2852 (Del.)]

For the A.Y. 1998-99, the
return of income filed by the assessee was processed u/s.143(1) of the
Income-tax Act, 1961. Subsequently, on the basis of the information given by the
DDIT (Investigation) that the assessee was allegedly the beneficiary of a bogus
claim of long-term capital gain, the Assessing Officer issued notice u/s.148 of
the Act and made an addition of Rs.20,70,000 in the reassessment proceedings.
The Tribunal quashed the reassessment proceedings holding it to be illegal.

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


“(i) The first sentence
of the reasons recorded by the Assessing Officer was mere information
received from the DDIT (Investigation). The second sentence was a direction
given by the same Deputy Director to issue a notice u/s.148. The third
sentence again comprised a direction given by the Additional Commissioner to
initiate proceedings u/s.148 in respect of cases pertaining to the relevant
ward.

(ii) The Assessing
Officer referred to the information and the two directions as reasons on the
basis of which he was proceeding to issue notice u/s.148.

(iii) These could not be
the reasons for proceeding u/s.147/148 of the Act. As the first part was
only an information and the second and the third parts of the reasons were
mere directions, it was not at all discernible as to whether the Assessing
Officer had applied his mind to the information and independently arrived at
a belief that, on the basis of the material which he had before him, income
had escaped assessment.

(iv) There was no
substantial question of law for consideration.”



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Rectification : S. 154 of Income-tax Act, 1961 : Interest u/s.234B not levied in assessment order relying on decision of Supreme Court : Subsequent retrospective amendment : Order not erroneous : Rectification not valid.

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Reported :


51 Rectification : S. 154 of
Income-tax Act, 1961 : Interest u/s.234B not levied in assessment order relying
on decision of Supreme Court : Subsequent retrospective amendment : Order not
erroneous : Rectification not valid.

[Shriram Chits
(Bangalore) Ltd. v. JCIT, 325 ITR 219 (Karn.)]

For the A.Y. 1998-99, the
assessment was completed u/s.143(3) of the Act. Following the judgment of the
Supreme Court in CIT v. Ranchi Club Ltd.; 247 ITR 209 (SC) interest was
not levied u/s. 234B of the Act. Subsequently, in view of the subsequent
retrospective amendment to S. 234B by the Finance Act, 2001 the Assessing
Officer rectified the assessment order u/s.154 of the Act and levied interest
u/s.234B of the Act. The Tribunal upheld the order of rectification.

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


“(i) In view of the
judgment of the Supreme Court in CIT v. Max India Ltd.; 295 ITR 282,
it was not possible for the Assessing Officer to reopen the case since the
Assessing Officer had rightly passed the order relying upon the judgment of
CIT v. Ranchi Club Ltd.; 247 ITR 209 (SC) while passing the order of
assessment.

(ii) Just because there
was a subsequent amendment, the Assessing Officer could not reopen the file.
The order of rectification was not valid.”



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Loss return : Delay in filing : Condonation of delay : S. 119(2) of Income-tax Act, 1961 : A.Y. 2004-05 : CBDT has power to condone the delay.

New Page 2

Reported :


49 Loss return : Delay in
filing : Condonation of delay : S. 119(2) of Income-tax Act, 1961 : A.Y. 2004-05
: CBDT has power to condone the delay.

[Lodhi Properties Co.
Ltd. v. Dept. of Revenue, 191 Taxman 74 (Del.)]

For the A.Y. 2004-05 the
assessee had filed return loss seeking carry forward of loss. The last date for
filing was 1-11-2004. The assessee’s representative reached the Central Revenue
building at around 5.15 p.m. on 1-11-2004. He was sent from one room to the
other and by the time he reached the room where his return was to be accepted,
it was already 6.00 p.m., when he was told that the return would not be accepted
because the counter had been closed. In such circumstance the return was filed
on the next day, i.e., on 2-11-2004. The assessee filed an application
u/s.119(2) of the Income-tax Act, 1961 to the CBDT for condonation of delay of
one day.

On a writ petition filed by
the assessee challenging the order of rejection, the Revenue contended that
since it was a case of a loss return, there was no provision under the law for
condoning the delay and that S. 119(2)(b) does not apply to such a case.

The Delhi High Court allowed
the writ petition and held as under :


“(i) The CBDT has the
power u/s.119(2) to condone the delay in the case of a return which is filed
late and where a claim for carry forward of losses is made.

(ii) In the instant
case, the impugned order u/s. 119 passed by the CBDT was a non-speaking one.
Normally, the matter would have been remanded to the CBDT to consider the
application of the assessee afresh. However, in the instant case, the delay
was only of one day and the circumstances had been explained and had not
been controverted by the respondents. A sufficient cause had been shown by
the assessee for the delay of one day in filing the return. If the delay was
not condoned, it would cause genuine hardship to the assessee. Thus, in the
circumstances of the case, instead of remanding the matter to the CBDT, the
delay of one day in filing of the return was to be directed to be condoned.”



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Capital gains : Transfer : A.Y. 1993-94 : Renunciation of right to subscribe to rights shares : Short-term capital loss : Renunciation in favour of general public : Does not amount to transfer : Loss notional : Not deductible.

New Page 2

Reported :

48. Capital gains : Transfer
: A.Y. 1993-94 : Renunciation of right to subscribe to rights shares :
Short-term capital loss : Renunciation in favour of general public : Does not
amount to transfer : Loss notional : Not deductible.

[CIT v. United Breweries
Ltd., 325 ITR 485 (Kar.)]

As a holding company of a
company M, the assessee had the right to subscribe to 61,26,394 rights shares in
M. The assessee subscribed only to 22,75,650 shares and renounced the right to
subscribe 1,54,100 shares for a consideration of Rs.22,84,000. As a result the
right to subscribe to the balance 38,50,744 rights shares was lost. The assessee
claimed that before the rights issue of shares, the market quotation of shares
in M was Rs.80 per share and after the rights issue was completed the market
price came down to Rs.70 per share. The assessee therefore contended that on
account of this diminution in the value of shares by Rs.10 per share the
assessee incurred a loss to right to subscribe to 38,50,744 shares at the rate
of Rs.10 per share and that the total net loss was Rs.3,62,23,440. The Assessing
Officer rejected the claim of the assessee. The Tribunal allowed the assessee’s
claim.

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


“(i) There was no
transfer of the rights in the rights shares in question by the transferor to
the transferee. In other words, the rights were renounced by the assessee in
favour of unknown persons and that too for ‘nil consideration’. Though the
transferor was the assessee, the act of transfer was not complete inasmuch
as there was no transfer in favour of the transferee. Transfer in favour of
an unknown person could not be a transfer.

(ii) When a share can be
sold at a profit either in the open market or at the face value at Rs.10,
there was no question of suffering of loss in the facts of the case. The
loss was only notional. As there was no transfer by way of renunciation, the
question of allowing capital loss in respect of notional loss would not
arise.”



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Bad debts : S. 36(1)(vii) of Income-tax Act, 1961 : No evidence that amount not taken into account in computing income of prior years : Bad debt allowable as deduction.

New Page 2

Reported :

47. Bad debts : S.
36(1)(vii) of Income-tax Act, 1961 : No evidence that amount not taken into
account in computing income of prior years : Bad debt allowable as deduction.

[CIT v. Dwarika
Industrial Development and Chains (P) Ltd., 325 ITR 211 (All.)]

In the relevant year, a sum
of Rs.6,27,735 was lying under the head ‘sundry debtors’, which the company was
not able to realise as this money was due and payable by one NB. The assessee
had sent several letters directing the debtor to pay the amount, but the debtor
did not even acknowledge the same. The assessee therefore, wrote off the said
amount as bad debt and claimed deduction u/s.36(1)(vii) of the Income-tax Act,
1961. The Assessing Officer disallowed the claim on the ground that the
conditions for allowance of the bad debt as provided u/s.36(2)(i) have not been
clearly brought out. The Commissioner (Appeals) allowed the assessee’s claim on
the ground that the Assessing Officer has not pointed out that this debt has not
been taken into account in computing the income in any earlier or previous year.
The Tribunal upheld the decision of the Commissioner (Appeals).

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


“(i) It was the specific
case of the assessee that the amount represented the sales effected to NB,
but because of the fact that there was no documentary evidence in support of
the claim as also the acknowledgement of the letters, the said amount was
written off. The Assessing Officer did not make any comment on this issue
and instead proceeded on the ground by simply saying that merely because the
amount has become bad the assessee cannot claim to reduce the income and
placed reliance on S. 36(2)(i) of the Act.

(ii) In our opinion, the
Commissioner (Appeals) had rightly observed that the Assessing Authority did
not find any material on record to show that the said amount has not been
taken into account in computing the income of any previous years.

(iii) That being the
position, in our considered opinion, the Tribunal had rightly upheld the
deletion.”



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Income deemed to accrue or arise in India : S. 9 of Income-tax Act, 1961 r/w Article 15 of DTAA between India and UK : A.Y. 1996-97 : Assessee non-resident rendering services in India : Assessee liable to be taxed in India only for that part of income att

New Page 1

 7 Income deemed to accrue or arise in India :
S. 9 of Income-tax
Act, 1961 r/w Article 15
of DTAA between India
and UK : A.Y. 1996-97 : Assessee non-resident rendering services in India :
Assessee liable to be taxed in India only for that part of income attributable
to services rendered by it in India and utilised in India.

[Clifford Chance v. Dy. CIT, 176 Taxman
458 (Bom.)]

The assessee was an international firm of
solicitors resident in the United Kingdom. It had no office or fixed base in
India. During the A.Y. 1996-97, it was appointed as the English law legal
adviser for four projects in India. Its partners were in India for more than
90 days. It filed its return of income showing income attributable to its
operations in India in respect of the said four projects. However, the
Assessing Officer held that the entire fees received by the assessee from the
four projects, whether services were rendered in India or outside India, was
taxable in India. The Tribunal upheld that view.

On appeal by the assesee the Bombay High Court
reversed the decision of the Tribunal and held as under :

“(i) The territorial nexus doctrine plays an
important part in the assessment of tax. Tax is levied on one transaction
where the operations, which may give rise to income, may take place partly in
one territory and partly in another territory. Income arising out of
operations in more than one jurisdiction would have territorial nexus with
each of the jurisdiction on actual basis. If that be so, it may not be correct
to contend that the entire income ‘accrues or arises’ in each of the
jurisdiction.

(ii) In the case of Ishikawajima Harima Heavy
Industries Ltd. v. DIT, (2007) 288 ITR 408, the Supreme Court, while
interpreting the provisions of S. 9(1)(vii)(c), has observed that it requires
two conditions to be met — the services which are the source of the income
that is sought to be taxed, have to be rendered in India, as well as utilised
in India, to be taxable in India. Both the above conditions have to be
satisfied simultaneously. Thus, for a non-resident to be taxed on income for
services, such a service needs to be rendered within India and has to be part
of a business or profession carried out by such person in India.

(iii) As per the judgment of the Supreme Court,
territorial nexus for the purpose of determining the tax liability is an
internationally accepted principle. An endeavor should, thus, be made to
construe the taxability of a non-resident in respect of income derived by it.
Having regard to the internationally accepted principle and the DTAA, no
extended meaning can be given to the words ‘income deemed to arise in India’
as expressed in S. 9 which incorporates various heads of income on which tax
is sought to be levied by the Republic of India. Whatever is payable by a
resident to a non-resident by way of fees for services, thus, would not always
come within the purview of S. 9(1)(vii). It must have sufficient territorial
nexus with India so as to furnish a basis for imposition of tax. Whereas a
resident would come within the purview of S. 9(1)(vii), a non-resident would
not, as services of a non-resident to a resident utilised in India may not
have much relevance in determining whether the income of a nonresident accrues
or arises in India. It must have a direct link with the services rendered in
India. When such a link is established, the same may again be subjected to any
relief under the DTAA. A distinction may also be made between rendition of
service and utilisation
thereof.


(iv)
The above
understanding of the law laid down by the Apex Court and S. 9(1)(vii)(c),
read in its plain language, envisage the fulfillment of two conditions:
services, which are source of income sought to be taxed in India, must
be (i) utilised in India; and (ii) rendered in India. In the instant
case, both those conditions had not been satisfied simultaneously.

(v)
In the above view of
the matter, contentions raised by the assessee were to be accepted. Thus the
income of the assessee charged on hourly basis in India and utilised in
India would only be chargeable to income-tax as disclosed in the return of
income.”

 

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Disallowance of expenditure : S. 14A of Income-tax Act, 1961 : Ss.(2) and Ss.(3) of S. 14A are constitutionally valid : They apply w.e.f. A.Y. 2007-08 : Rule 8D is not ultra vires S. 14A : It applies w.e.f. A.Y. 2008-09.

New Page 2

Unreported :


46 Disallowance of
expenditure : S. 14A of Income-tax Act, 1961 : Ss.(2) and Ss.(3) of S. 14A are
constitutionally valid : They apply w.e.f. A.Y. 2007-08 : Rule 8D is not

ultra vires
S. 14A : It applies w.e.f. A.Y. 2008-09.


[Godrej & Boyce v. DCIT (Bom.),
WP No. 758 of 2010 dated 12-8-2010]

In the writ petition
challenging the validity of S. 14A and Rule 8D, the Bombay High Court has held
as under :


“(i) S. 14A supersedes
the principle of law that in the case of a composite business, expenditure
incurred towards tax-free income could not be disallowed and incorporates an
implicit theory of apportionment of expenditure between taxable and
non-taxable income. Once a proximate cause for disallowance is established,
which is the relationship of the expenditure with income which does not form
part of the total income, a disallowance u/s.14A has to be effected.

(ii) The test which has
been enunciated in Walfort for attracting the provisions of S. 14A is that
“there has to be a proximate cause for disallowance which is its
relationship with the tax exempt income”. Once the test of proximate cause,
based on the relationship of the expenditure with tax exempt income is
established, a disallowance would have to be effected u/s.14A.

(iii) The provisions of
Ss.(2) and Ss.(3) of S. 14A are constitutionally valid. Ss.(2) and Ss.(3) of
S. 14A are not retrospective. They apply w.e.f. 1-4-2007 i.e., from
A.Y. 2007-08.

(iv) In the affidavit in
reply that has been filed on behalf of the Revenue an explanation has been
provided for the rationale underlying Rule 8D. In the written submissions
which have been filed by the Additional Solicitor General it has been
stated, with reference to Rule 8D(2)(ii) that since funds are fungible, it
would be difficult to allocate the actual quantum of borrowed funds that
have been used for making tax-free investments. It is only the interest on
borrowed funds that would be apportioned and the amount of expenditure by
way of interest that will be taken (as ‘A’ in the formula) will exclude any
expenditure by way of interest which is directly attributable to any
particular income or receipt (for example, any aspect of the assessee’s
business such as plant/machinery, etc.).

(v) Rule 8D is not
ultra vires the provisions of S. 14A. The Assessing Officer cannot
ipso facto apply Rule 8D, but can do so only where he records
satisfaction on an objective basis that the assessee is unable to establish
the correctness of its claim.

(vi) Rule 8D is
prospective and applies w.e.f. A.Y. 2008-09. For prior years the Assessing
Officer has to enforce the provisions of S. 14A(1).

(vii) U/s.14A(1), it is
for the Assessing Officer to determine as to whether the assessee had
incurred any expenditure in relation to the earning of income which does not
form part of the total income. The Assessing Officer would have to arrive at
his determination after providing an opportunity to the assessee to furnish
its accounts and to place on record all relevant material in support of the
circumstances which are considered to be relevant and germane.

(viii) The argument that
dividend on shares/units is not tax-free in view of the dividend
distribution tax paid by the payer u/s.115-O is not acceptable, because such
tax is not paid on behalf of the shareholder, but is paid in
respect of the payer’s own liability.”



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Income : S. 2(24) of Income-tax Act, 1961 : A.Ys. 1987-88 and 1988-89 : Refund collected by producing bogus TDS certificates is income taxable under residuary head.

New Page 1

 6 Income : S.
2(24) of Income-tax Act, 1961 :
A.Ys. 1987-88 and
1988-89 : Refund collected by producing bogus TDS certificates is income
taxable under residuary head.

[CIT v. K. Thangamani, 309 ITR 15 (Mad.)]

The assessee was engaged in tax consultancy and
audit work. For the A.Ys. 1987-88 and 1988-89 the Assessing Officer assessed
the refunds received by the assessee on the basis of bogus TDS certificates as
income from other sources. The Tribunal deleted the addition holding that the
amount of refunds received by the assessee by fraudulent means could not be
assessed as income of the assessee.

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

“(i) The expression ‘income’ in S. 2(24) of the
Income-tax Act, 1961 is wide and the object of the Act being to tax income it
has to be given an extended meaning. Any kind of income earned by the assessee
attracts income-tax at the point of earning and tax law is not concerned with
the ultimate event how the income is expended. The Act makes an obligation to
pay tax on all income received. The Act considers income earned legally as
well as tainted income alike.

(ii) When the Tribunal found that the assessee
had indulged in fabricating TDS certificates and got refunds from the
Department, it should not have come to the conclusion that such income was not
taxable. There is a clear factual finding recorded by the Assessing Officer as
well as the Commissioner (Appeals) to the effect that the assessee had
indulged in filing bogus TDS certificates and got refund of the amount from
the Department. It was also the admitted case of the assessee before the
Department as well as the Central Bureau of Investigation during the course of
investigation into the offence that he had indulged in the act of fabricating
TDS certificates and collecting refunds from the Department.”

 

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Educational institution : Exemption u/s. 5 10(23C)(vi) of Income-tax Act, 1961 : Application filed after prescribed time : No statutory bar for condonation : Application for condonation of delay should be considered.

New Page 1

 5 Educational institution : Exemption u/s.
5 10(23C)(vi) of
Income-tax Act, 1961 : Application filed after prescribed time : No statutory
bar for condonation : Application for condonation of delay should be
considered.



[Padmashree Krutarth Acharya Institute of
Engineering and Technology v. Chief CIT, 309 ITR 13 (Ori.)]

The assessee is an educational institution
eligible for exemption u/s.10(23C)(vi) of the Income-tax Act, 1961. It filed
an application for grant of approval for exemption u/s.10(23C)(vi) of the Act.
The Chief Commissioner rejected the application on the ground that the
application was filed beyond time and the proviso added to S. 10(23C)(vi) did
not empower him to condone the delay.

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

“(i) The Commissioner while deciding the rights
of the parties acts in a quasi-judicial capacity and has to decide the rights
after a hearing. Any authority exercising such quasi-judicial functions should
also have incidental power of condoning delay if there was a justifiable
ground for such condonation. There is no clear statutory bar precluding such
condonation.

(ii) The Commissioner was to decide the
application for condonmation of delay on the merits and then consider the
application for exemption on the merits.”

 


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Busness expenditure : S. 37(1) of Income-tax Act, 1961 : Textile business : Closure of one unit : Retrenchment compensation, interest, PF to employees, legal expenses and reimbursement of loss to PF trust on sale of securities is allowable business expend

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 3 Busness expenditure : S. 37(1) of Income-tax
Act, 1961 : Textile business : Closure of one unit : Retrenchment
compensation, interest, PF to employees, legal expenses and reimbursement of
loss to PF trust on sale of securities is allowable business expenditure.

[CIT v. DCM Ltd., 221 CTR 513 (Del.)]

The assessee was in the business of textile
manufacturing. It closed one of its manufacturing units out of four units. It
paid Rs.8,71,20,781 by way of retrenchment compensation. It had incurred an
expenditure of Rs.1,86,69,703 by way of interest on monies borrowed for the
purpose of payment of retrenchment compensation and PF to the employees of the
closed unit. It had also incurred an expenditure of Rs.3,57,700 as legal
expenses on account of the closure of the unit. The Assessing Officer
disallowed the claim for deduction of the these expenses.

On termination of services of the employees of
the closed unit when the PF dues were required to be paid, the employees PF
trust approached the RPF Commissioner to obtain approval for sale of
Government securities, in order to make payment to the employees. The RPF
Commissioner granted the permission with a caveat that in the event of any
deficiency on sale of securities the burden would have to be borne by the
assessee, in order to assure that the employees would get the rate of interest
equivalent to the rate paid by the Central Government. The loss so incurred by
the employees PF trust was Rs.1,80,20,261 and the same was reimbursed by the
assessee to the trust. The assessee’s claim for deduction of the said
expenditure was rejected by the Assessing Officer relying on the provisions of
S. 14A of the Act. The Tribunal allowed the assessee’s claims.

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

“(i) As found by the Tribunal there was no
closure of business since DCM mill unit was only a part of the textile
manufacturing operations, which continued even after the closure of the DCM
mill unit as the assessee continued in the business of manufacture of textiles
in the three remaining units. It is specifically noted that the assessee
prepared a consolidated P & L a/c and balance sheet of all its manufacturing
units taken together. The control and management of the assessee was
centralised in the head office, and also, the fact that all important policy
decisions were taken at the head office. The Tribunal came to the conclusion
that there was interconnection, interlacing and unity of control and
management, common decision-making mechanism and use of common funds in
respect of all four units. It repelled the arguments of the Revenue for
consideration that the DCM mill unit was a separate business and hence with
the closure of the DCM mill unit, the assessee ought not to be allowed
deduction of the expenses, based on the fact that in respect of the DCM mill
unit the assessee maintained separate books of account and engaged separate
workers. In view of the finding of fact returned by the Tribunal, no fault can
be found with the
reasoning of the Tribunal.

(ii) Expenditure incurred by the assessee company
to make up the deficiency arising on sale of securities by the employees PF
trust in order to ensure that its employees are paid a rate of interest
equivalent to that paid by the Central Government was an expenditure incurred
by the assessee towards its employees and, therefore, provisions of S. 14A
were not applicable.”

 

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Business expenditure : Bonus : S. 36(1)(ii) of Income-tax Act, 1961 : A.Y. 1985-86 : Customary bonus over and above payable under the Bonus Act : Paid for last 10 years as a practice : Eligible for deduction u/s.36(1)(ii) second proviso.

New Page 1

 4 Business expenditure : Bonus : S. 36(1)(ii)
of Income-tax Act, 1961 : A.Y. 1985-86 : Customary bonus over and above
payable under the Bonus Act : Paid for last 10 years as a practice : Eligible
for deduction u/s.36(1)(ii) second proviso.

[CIT v. Sesa Goa Ltd., 221 CTR 590 (Bom.)]

As a general practice in the business, the
assessee had paid an amount of Rs.18,73,192 by way of bonus to the employees
over and above the statutory bonus prescribed under the Bonus Act and claimed
the deduction. The Assessing Officer disallowed the claim for deduction
holding that it is not permissible u/s.36 of the Income-tax Act, 1961. 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) It is true that wherever a bonus is paid to
an employee in excess or otherwise than what is required to be paid under the
Bonus Act, such a payment is not entitled for deduction automatically, but the
assessee has to satisfy all the three ingredients, namely, the pay of the
employee and the condition of his service; the profits of the business or
profession for the previous year in question; and the general practice in
similar business and profession. The determination of these conditions should
lead to bonus being reasonable, and therefore, entitled to deduction in terms
of second proviso to S. 36(1)(ii).

(ii) In the present case, the assessee had been
paying bonus for the last 10 years otherwise in excess of the Bonus Act and
this had become a practice and the CIT(A) as well as the Tribunal have
recorded the finding that such bonus was payable as a general practice
followed in similar business or profession. The finding in question being a
primary question of fact, there is no reason to interfere with the impugned
order.”

 


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Appellate Tribunal : A.Y. 2001-02 : Order passed beyond four months after hearing and without giving reasons : Quashed as not valid.

New Page 1

 2  Appellate Tribunal : A.Y. 2001-02 : Order passed
beyond four months after hearing and without giving reasons : Quashed as

not valid.


[Shivsagar Veg Restaurant, 176 Taxman 260 (Bom.)]

For the A.Y. 2001-02 the Tribunal had heard the
assessee’s appeal on 2-6-2005, but the order was passed on 21-10-2005 i.e.,
almost after a delay of more than four months dismissing the appeal without
recording reasons, discussing propositions of law and case law relied upon by
the assessee.

On appeal filed by the assessee the Bombay High
Court set aside the order of the Tribunal for fresh disposal and held as under :

“(i) The Appellate Tribunal being the final author-ity
of facts, it is incumbent upon it to appreciate the evidence, consider the
reasons of the authorities below and assign its own reasons as to why it
disagrees with the reasons and findings of the authorities below. Merely because
the Tribunal happened to be an appellate authority, it does not get the right to
brush aside reasons or findings recorded by the first authority or the lower
appellate authority. It has to examine validity of the reasons given and
findings recorded. Mere recording that the conclusions arrived at did not
require discussion of the case law and other propositions of law is no
consideration. Merely by saying that the findings of the Commissioner (Appeals)
are just, fair and in accordance with the law can hardly tantamount to giving
reasons. The absence of reasons had rendered the impugned order of the Tribunal
unsustainable.

 

(ii) The basic rule of natural justice requires
recording of reasons in support of the order. The order has to be
self-explanatory and should not keep the Higher Court guessing for reasons.
Reasons provide live link between conclusion and evidence and that vital link
is a safeguard against arbitrariness, passion and prejudice.

(iii) Reason is a manifestation of mind of
adjudicator. It is a tool for judging the validity of the order under
challenge. It gives opportunity to the Higher Court to see whether or not the
adjudicator has proceeded on the relevant consideration, material and
evidence.

(iv) Having said so, the inordinate unexplained
delay in pronouncement of the impugned judgment had also rendered it
vulnerable.”

 

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Wealth Tax : Valuation of immovable property sublet by tenant : To be determined on basis of rent and deposit received by assessee from tenant, irrespective of rent and deposit received by tenant from sub-tenant

New Page 1

12 Wealth-tax : Valuation of immovable property sublet by
tenant : For determining the value of the property u/r. 3 of Schedule III to W.
T. Act, 1957 the rent and deposit received by the assessee from the tenant and
not the rent and deposit received by the tenant from the sub-tenant or ultimate
user of the premises are to be taken into account.


[CWT v. Spellbound Trading (P) Ltd., 214 CTR 324 (Bom.)]

Dealing with Rule 3 of Schedule III to the Wealth-tax Act,
1957 for valuation of immovable property, the Bombay High Court held as under :

“Rent and deposit received by the assessee from the tenant and not the rent
and deposit received by the tenant from the sub-tenant or ultimate user of the
premises are to be taken into account for determining the value of the property
under Rule 3 of Schedule III to the Wealth-tax Act.”



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Appeal to CIT(A) : S. 143(1) and S. 246 of Income-tax Act, 1961 : A.Y. 1995-96: CIT(A) allowed appeal in respect of one claim and rejected in respect of another : Not justified : Claims on basis of facts on record should be considered : Tax can be collect

New Page 1

 1 Appeal to CIT(A) : S. 143(1) and S. 246 of 
Income-tax Act, 1961 : A.Y. 1995-96: CIT(A) allowed appeal in respect of one
claim and rejected in respect of another : Not justified : Claims on basis of
facts on record should be considered : Tax can be collected only as per law.

[Balmukund Acharya v. Dy. CIT, 176 Taxman
316 (Bom.)]

In the return of income for the A.Y. 1995-96 the
assessee had computed long-term capital gain on sale of godown taking the cost
of acquisition as Nil. However, he had not claimed exemption of the capital
gain. The Assessing Officer passed an order u/s.143(1) of the Income-tax Act,
1961 and sent an intimation and demand notice including interest u/ s.234C of
the Act. In appeal before the CIT(A) the assessee raised two grounds. In the
first ground the assessee claimed that the interest liability u/s.234C is not
applicable in the case of capital gain, as there was no obligation for payment
of advance tax. In the second ground the assessee claimed that there is no tax
liability on the capital gain, since the cost of acquisition was Nil. The
CIT(A) allowed the first ground and directed the Assessing Officer to
recalculate the same. The Tribunal rejected the assessee’s appeal.

On appeal by the assessee, the Bombay High Court allowed the
assessee’s claim and held as under : “(i) For the A.Y. 1995-96, appeal lies
against an intimation u/s.143(1).

(ii) The authorities under the Act are under an
obligation to act in accordance with law. Tax can be collected only as
provided under the Act. If any assessee, under a mistake, misconceptions or on
not being properly instructed, is over-assessed, the authorities under the Act
are required to assist him and ensure that only due legitimate taxes are
collected. If a particular levy is not permitted under the Act, tax cannot be
levied by applying the doctrine of estoppel.

(iii) Acquiescence cannot take away from a party the relief
that she is entitled to where the tax is levied or collected without
authority of law. In the instant case, it was obligatory on the part of
the Assessing Officer to apply his mind to the facts disclosed in the
return and assess the assessee, keeping in mind the law holding the field.

 

(iii) One more aspect needs to be touched while
disposing of the appeal. The
Commissioner (Appeals) had entertained appeal in part and rejected in part.
If the appeal is not maintainable, it is not maintainable at all. It cannot
be said that for a particular ground, an appeal is maintainable and for
another it is not. Once the appeal is filed and entertained, then all
grounds can be raised by the appellant requiring consideration. If the
Revenue was of the view that an appeal itself was not maintainable before
the Commissioner (Appeals), in that event, the order of the Commissioner
(Appeals) allowing appeal in part was bad order and that part of the order
ought to have been challenged by the Revenue. The Revenue did not challenge
the said order believing maintainability of the appeal. The Revenue at that
stage could not be allowed to contend otherwise. It could not be allowed to
blow hot and cold. Thus, taking an overall view of the matter and for the
reasons recorded, the appeal preferred by the assessee was very much
maintainable.”

 

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Survey : S. 69 and S. 133A : Addition to income merely on the basis of the statement recorded in the course of survey : Invalid

New Page 1

11 Survey : S. 69 and S. 133A of Income-tax Act, 1961 : A.Y.
2001-02 : Addition to income merely on the basis of the statement recorded in
the course of survey : Not valid.


[CIT v. S. Khader Khan Son, 214 CTR 589 (Mad.)]

On 24-07-2001, survey action u/s.133A of the Income-tax Act,
1961 was carried out in the premises of the assessee, wherein a statement of the
partner was recorded offering an additional income of Rs.20,00,000 for the A.Y.
2001-02 and Rs.30,00,000 for the A.Y. 2002-03. The said statement was retracted
by the assessee through a letter dated 3-8-2001. The Assessing Officer made
additions to the income on the basis of the survey. The CIT(A) and the Tribunal
deleted the addition.

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

“S. 133A does not empower any I. T. Authority to examine
any person on oath, hence, any such statement has no evidentiary value and any
admission made during such statement cannot, by itself, be made the basis for
addition.”




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Impounding of documents : Scope of power u/s.131(3) of Income-tax Act, 1961 : Document does not include passport : Passport cannot be impounded u/s.131.

New Page 1

Reported :

25 Impounding of documents : Scope of power u/s.131(3) of
Income-tax Act, 1961 : Document does not include passport : Passport cannot be
impounded u/s.131.

[Avinash Bhosale v. UOI, 322 ITR 381 (Bom.)]

In a writ petition challenging the authority of impounding of
the passport with reference to S. 131(3) of the Income-tax Act, 1961, the Bombay
High Court held as under :

“(i) In Suresh Nanda’s case (2008) 3 SCC 674, the Supreme
Court was dealing with power of a Court to impound a document and, in that
context, held that ‘document’ does not include a passport.

(ii) If by an interpretative process the Supreme Court held
that even a Court cannot impound a passport, then, it would be highly
inappropriate to interpret the term ‘documents’ used in S. 131(3) of the
Income-tax Act, 1961, so as to enable the executive authorities to impound the
passport.

(iii) A passport cannot be impounded u/s.131 of the Act.”

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Assessment : Validity : Block period 1-4-1990 to 20-8-2000 : Copies of seized material not provided to assessee, nor assessee given opportunity to cross-examine person whose statement AO relied upon : Fatal to proceedings : Addition cannot be sustained.

New Page 1

Reported :

23 Assessment : Validity : Block period 1-4-1990 to
20-8-2000 : Copies of seized material not provided to assessee, nor assessee
given opportunity to cross-examine person whose statement AO relied upon : Fatal
to proceedings : Addition cannot be sustained.

[CIT v. Ashwani Gupta, 322 ITR 396 (Del.)]

In an appeal against the block assessment order the
Commissioner (Appeals) found that the Assessing Officer had passed the
assessment order in violation of the principles of natural justice inasmuch as
he had neither provided copies of the seized material to the assessee, nor had
he allowed the assessee to cross-examine the person on the basis of whose
statement the addition was made. He therefore held that the entire addition made
by the Assessing Officer was invalid and accordingly deleted the addition. The
Tribunal confirmed the order of the Commissioner (Appeals).

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

“(i) The Revenue had accepted the findings of the Tribunal
on facts as also the position that there had been a violation of the
principles of natural justice. However, its plea was that the violation of the
principles of natural justice was not fatal so as to jeopardise the entire
proceedings.

(ii) The Tribunal correctly held that once there was a
violation of the principles of natural justice inasmuch as seized material was
not provided to an assessee, nor was cross-examination of the person on whose
statement the Assessing Officer relied upon, granted, such deficiencies would
amount to a denial of opportunity and, consequently, would be fatal to the
proceedings.

(iii) No substantial question of law arose.”


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Business expenditure : Expenditure on prospecting, etc. of minerals : Applicability of S. 35E of Income-tax Act, 1961 : A.Y. 2001-02 : Assessee in business of prospecting or exploration of ores and minerals and not in business of mining ores and minerals

New Page 1

Reported :

24 Business expenditure : Expenditure on prospecting, etc. of
minerals : Applicability of S. 35E of Income-tax Act, 1961 : A.Y. 2001-02 :
Assessee in business of prospecting or exploration of ores and minerals and not
in business of mining ores and minerals : No possibility of commercial
production : S. 35E not workable : S. 35E not applicable : Assessee entitled to
deduction of entire expenditure.

[CIT v. ACC Rio Tinto Exploration Ltd., 230 CTR 383
(Del.)]

The assessee company is engaged in the business of
prospecting and exploring ores and minerals. For the A.Y. 2001-02, the Assessing
Officer disallowed the claim for deduction of the expenditure on the ground that
the provisions of S. 35E of the Income-tax Act, 1961 were applicable to the case
of the assessee and that the expenditure will be allowable in the year of
commercial production. The Assessing Officer rejected the contention of the
assessee that the provisions of S. 35E are not applicable since the assessee is
engaged in the business of exploring and prospecting of ores and minerals and
that it was not engaged in commercial production of any mineral. The CIT(A)
found that the activity of exploration constituted a separate activity by itself
as different and distinct from commercial production and allowed the assessee’s
claim. The Tribunal upheld the decision of the CIT(A).

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

“(i) Upon a plain reading of the provisions of S. 35E, it
is apparent that unless and until there is commercial production, the
provisions of S. 35E(1) would be unworkable. The expression ‘year of
commercial production’ referred to in S. 35E(2) is defined in S. 35E(5)(b).
Unless and until there is actual commercial production, the phrase ‘year of
commercial production’, appearing in S. 35E(2), would be rendered meaningless.

(ii) The Tribunal has, on facts, come to the conclusion
that the assessee-company’s objects did not include mining of ores or minerals
or commercial production, in the sense understood within the meaning of S.
35E. Consequently, the Tribunal agreed with the assessee’s contention that
there would never be commercial production of any mineral or ore as a part of
the activities of the assessee.

(iii) Consequently, the provisions of S. 35E would not be
applicable to the facts and circumstances of the present case as there was no
possibility of any commercial production.”


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Revision : S. 197 and S. 264 of Income-tax Act, 1961 : An order rejecting application u/s.197 for lower rate for deduction of tax is an order which can be revised u/s.264.

New Page 1

Unreported

22 Revision : S. 197 and S. 264 of Income-tax Act, 1961 : An
order rejecting application u/s.197 for lower rate for deduction of tax is an
order which can be revised u/s.264.

[Larsen & Toubro Ltd. & Anr. (Bom.), W.P.(L) No. 694
of 2010, dated 28-4-2010]

On 29-10-2009, the petitioner had made an application to the
Assessing Officer u/s.197 of the Income-tax Act, 1961 for issuing a certificate
authorising MMRDA to deduct tax at source at a lower rate of 0.11% from the
payments made by it to the petitioner under a contract. The application was
rejected by the Assessing Officer. The petitioner therefore preferred a revision
petition u/s.264 to the Commissioner. The Commissioner rejected the application
inter alia on the ground that when the Assessing Officer rejects an
application u/s.197, he does not pass an ‘order’ as envisaged in S. 264 and
consequently, a revision u/s.264 is not maintainable.

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

“(i) The Commissioner is manifestly in error when he holds
that the rejection of an application u/s.197 by the Assessing Officer does not
result in an order and that the revisional power which is vested in the
Commissioner u/s.264 would not be attracted.

(ii) The Assessing Officer when he rejects an application
is bound to furnish reasons which would demonstrate an application of mind by
him to the circumstances which are mandated both by the statute and by the
Rules to be taken into consideration. Hence, it would be impossible to accept
the view that the rejection of an application u/s.197 does not result in an
order.

(iii) The expression ‘order’ for the purposes of S. 264 has
a wide connotation. The Parliament has used the expression ‘any order’. Hence,
any order passed by an authority subordinate to the Commissioner, other than
an order to which S. 263 applies, is subject to the revisional jurisdiction
u/s.264. A determination of an application u/s.197 requires an order to be
passed by the Assessing Officer after application of mind to the circumstances
which are germane u/s.197 and the rules framed U/ss.2A.

(iv) The Commissioner was, therefore, manifestly in error
when he held that there was no order which would be subject to his revisional
jurisdiction u/s.264.”


Reported :

23 Assessment : Validity : Block period 1-4-1990 to
20-8-2000 : Copies of seized material not provided to assessee, nor assessee
given opportunity to cross-examine person whose statement AO relied upon : Fatal
to proceedings : Addition cannot be sustained.

[CIT v. Ashwani Gupta, 322 ITR 396 (Del.)]

In an appeal against the block assessment order the
Commissioner (Appeals) found that the Assessing Officer had passed the
assessment order in violation of the principles of natural justice inasmuch as
he had neither provided copies of the seized material to the assessee, nor had
he allowed the assessee to cross-examine the person on the basis of whose
statement the addition was made. He therefore held that the entire addition made
by the Assessing Officer was invalid and accordingly deleted the addition. The
Tribunal confirmed the order of the Commissioner (Appeals).

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

“(i) The Revenue had accepted the findings of the Tribunal
on facts as also the position that there had been a violation of the
principles of natural justice. However, its plea was that the violation of the
principles of natural justice was not fatal so as to jeopardise the entire
proceedings.

(ii) The Tribunal correctly held that once there was a
violation of the principles of natural justice inasmuch as seized material was
not provided to an assessee, nor was cross-examination of the person on whose
statement the Assessing Officer relied upon, granted, such deficiencies would
amount to a denial of opportunity and, consequently, would be fatal to the
proceedings.

(iii) No substantial question of law arose.”


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Reassessment : S. 147, S. 148 and S. 154 of Income-tax Act, 1961 : A.Y. 2004-05 : Reason to believe : Where the AO has option to rectify the assessment order u/s.154, reopening of assessment u/s.147 is not justified.

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Unreported

20 Reassessment : S. 147, S. 148 and S. 154 of Income-tax
Act, 1961 : A.Y. 2004-05 : Reason to believe : Where the AO has option to
rectify the assessment order u/s.154, reopening of assessment u/s.147 is not
justified.

[Hindustan Unilever Ltd. v. Dy. CIT (Bom.), W. P. No.
85 of 2009, dated 1-4-2010]

In the case of the petitioner, the assessment for the A.Y.
2004-05 was completed by an order dated 27-12-2006 passed u/s.143(3) of the
Income-tax Act, 1961. Subsequently, the Assessing Officer issued a notice
u/s.148, dated 7-4-2008 for reopening the assessment. Briefly, the reasons given
for reopening the assessment are as under :

“(i) The following deductions have been wrongly allowed in
the assessment order passed u/s. 143(3) of the Act :


(a) Deduction of Rs.10,84,07,449 as loss of plantation
division, being 40% of the loss on sale of tea is wrongly allowed. Rule 8
applies to income and not for loss.

(b) Deduction of Rs.3,07,50,000 u/s.54EC has been
wrongly allowed since the transfer of the asset is on 29-9-2003 and the
date of allotment of the bond is 31-3-2004, which is beyond the prescribed
period of six months.

(c) Loss of Rs.1,33,49,654 of a unit eligible for
deduction u/s.10B has been wrongly allowed to be set off against normal
business income and this has resulted in excessive deduction u/s.10B to
that extent.

(ii) Deduction of loss of Rs.10,84,07,449 from
plantation division has been allowed twice and as such there is
computation error.



The Bombay High Court quashed the notice u/s. 148, dated
7-4-2008 and held as under :

“(i) Loss from plantation division : Rule 8 creates
a legal fiction, as a result of which the income which is derived from the
sale of tea is to be computed as if it is income derived from business. In the
present case, the Assessing Officer, while issuing a notice for re-opening the
assessment, observed that the provisions of Rule 8 are applicable ‘only in the
case of income’ and the claim of the assessee to set off 40% of losses against
normal business profits could not be allowed. On this basis the Assessing
Officer has formed the opinion that the loss of Rs.10.84 crores attributable
to the business activity of the assessee involving the manufacture and sale of
tea was liable to be disallowed. It is on the basis of Rule 8 that the
Assessing Officer seeks to postulate that the loss attributable to the
business activity of the assessee would have to be disregarded on the ground
that it is not allowable expenditure. This inference which is sought to be
drawn by the Assessing Officer is contrary to the plain meaning of the
charging provisions of the Act; and to Rule 8, besides being contrary to the
position in law as laid down by the Supreme Court. The assessee was lawfully
entitled to adjust the loss which arose as a result of the business activity
under Rule 8.

(ii) Deduction u/s.54EC : The assessee transferred
the asset on 29-9-2003. The period of six months was due to expire on
28-3-2004. The assessee invested an amount of Rs.3.07 crores on 19-3-2004. A
receipt was issued on that date by the National Housing Bank. A debit was
reflected in the bank account of the assessee to the extent of the sum
invested on 19-3-2004. The certificate of bond was issued by the National
Housing Bank on 9-6-2004, which refers to the date of allotment as 31-3-2004.
For the purpose of the provisions of S. 54EC, the date of the investment by
the assessee must be regarded as the date on which the payment was made and
received by the National Housing Bank. This was within a period of six months
from the date of the transfer of the asset. Consequently the provisions of S.
54EC were complied with by the assessee. There is absolutely no basis in the
ground for re-opening the assessment.

(iii) Loss incurred by eligible unit u/s.10B : While
re-opening the assessment, the Assessing Officer has proceeded on the basis
that S. 10B provides an exemption and that in respect of the Crab Stick Unit
the assessee had suffered a loss of Rs.1.33 crores. The Assessing Officer has
observed that since the income of the unit was exempt from taxation, the loss
of the unit could not have been set off against the normal business income.
However this was allowed by the assessment order and it is opined that the
assessee’s income to the extent of Rs.1.33 crores has escaped assessment. The
Assessing Officer while re-opening the assessment ex-facie proceeded on
the erroneous premise that S. 10B is a provision in the nature of an
exemption. Plainly, S. 10B as it stands is not a provision in the nature of an
exemption, but provides for a deduction. The provision as it earlier stood was
in the nature of an exemption. After the substitution of S. 10B by the Finance
Act, 2000, the provision as it now stands provides for a deduction.
Consequently, it is evident that the basis on which the assessment has sought
to be re-opened is belied by a plain reading of the provision. The Assessing
Officer was plainly in error in proceeding on the basis that because the
income is exempted, the loss was not allowable. All the four units of the
assessee were eligible u/s.10B. Three units had returned a profit, while the
Crab Stick Unit had returned a loss. The assessee was entitled to a deduction
in respect of the profits of the three eligible units, while the loss
sustained by the fourth unit could be set off against the normal business
income. In the circumstances, the basis on which the assessment is sought to
be re-opened is contrary to the plain language of S. 10B.

(iv) Computational error : The other ground on which
the assessment is sought to be re-opened is the computational error in the
assessment order resulting in the deduction of the loss from plantation
division of Rs. 10.84 crores twice. There can be no dispute about the position
that the computational error that has been made by the Assessing Officer in
the present case is capable of being rectified u/s.154(1). Where the power to
rectify an order of assessment u/s.154(1) is adequate to meet a mistake or
error in the order of assessment, the Assessing Officer must take recourse to
that power as opposed to the wider power to re-open the assessment. The
assessee cannot be penalised for a fault of the Assessing Officer. The
provisions of the statute lay down overlapping remedies which are available to
the Revenue, but the exercise of these remedies must be commensurate with the
purpose that is sought to be achieved by the Legislature. The re-opening of an
assessment u/s.147 has serious remifications. Therefore, before recourse can
be taken to the wider power to reopen the assessment on the ground that there
is a computation error, as in the present case, the Assessing Officer ought to
have rectified the mistake by adopting the remedy available u/s.154 of the
Act.

All statutory powers have to be exercised
reasonably. Where a statute confers an area of discretion, the exercise of that
discretion is structured by the requirement that discretionary powers must be
exercised reasonably. The remedies which the law provides are tailored to be
proportional to the situation which the remedy resolves. Where the statute
provides for several remedies, the choice of the remedy must be appropriate to
the underlying basis and object of the conferment of the remedy. A simple
computational error can be resolved by rectifying an order of assessment
u/s.154(1). It would be entirely arbitrary for the Assessing Officer to reopen
the entire assessment u/s.147 to rectify an error or mistake which can be
rectified u/s.154. An arbitrary exercise of power is certainly not a
consequence which the Parliament contemplates. We, therefore, hold that in this
case the Revenue has an efficacious remedy open to it in the form of a
rectification u/s.154 for correcting the computational error and that
consequently recourse to the provisions of S. 147 was not warranted.

 For all the aforesaid
reasons, we are of the view that the Assessing Officer could not possibly have
formed a belief that the income chargeable to tax had escaped assessment within
the meaning of S. 147.”

Recovery of tax : Company : Directors liability u/s.179 of Income-tax Act, 1961 : A.Y. 1990-91 : Liability does not extend to penalty payable by the company.

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21 Recovery of tax : Company : Directors liability u/s.179 of
Income-tax Act, 1961 : A.Y. 1990-91 : Liability does not extend to penalty
payable by the company.

[Dinesh T. Tailor v. TRO (Bom.), W.P. No. 641 of 2010,
dated 27-4-2010]

The petitioner was a director of a company called Yazad
Investment & Finance Pvt. Ltd. up to 14-10-1989. By an order u/s.179 of the
Income-tax Act, 1961 the Assessing Officer raised a demand of Rs. 12.74 lakhs
against the petitioner, which is the liability of the said company for the A.Y.
1990-91 by way of tax and also the penalty u/s.271(1)(c) payable by the company.

On a writ petition filed by the petitioner challenging the
said order, the Bombay High Court set aside the said order u/s.179 for
reconsideration and also held that the liability of a director u/s.179 does not
extend to the penal liability payable by the company. The High Court held as
under :

“(i) S. 179(1) refers to ‘any tax due from a private
company’ and every director of the company is jointly and severally liable for
the payment of ‘such tax’, which cannot be recovered from the company. The
expression ‘tax due’ and, for that matter the expression ‘such tax’ must mean
tax as defined for the purposes of the Act by S. 2(43).

(ii) ‘Tax due’ will not comprehend within its ambit a
penalty.”


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MAT credit : Interest u/s.234B of Income-tax Act, 1961 : A.Y. 2000-01 : Credit for brought forward MAT is to be given from gross demand before charging interest u/s.234B.

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Unreported

19 MAT credit : Interest u/s.234B of Income-tax Act, 1961 :
A.Y. 2000-01 : Credit for brought forward MAT is to be given from gross demand
before charging interest u/s.234B.

[CIT v. Apar Industries Ltd. (Bom.), ITA No. 1036 of
2009, dated 6-4-2010]

In an appeal filed by the Revenue for the A.Y. 2000-01, the
following question was raised before the Bombay High Court :

“Whether on the facts and in the circumstances of the case,
the Tribunal erred in law in holding that credit for brought forward MAT is to
be given from gross demand before charging interest u/s.234B of the Income-tax
Act, 1961 ?”

Following the judgment of the Delhi High Court in CIT v.
Jindal Exports Ltd., 314 ITR 137 (Del.), the Bombay High Court upheld the
decision of the Tribunal and held as under :

“(i) The sum represented by the available MAT credit would
fall within the expression ‘tax . . . . already paid under any provision of
this Act’ in S. 140A(1).

(ii) The expression tax paid ‘otherwise’ in S. 234B(2)
would take within its sweep any tax paid under a provision of the Act,
including the MAT credit.

(iii) The amendment to Explanation (1) of S. 234B by the
Finance Act, 2006 is clarificatory.

(iv) Credit for brought forward MAT is to be given from
gross demand before charging interest u/s.234B.”


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Industrial undertaking : Deduction u/s.80IB of Income-tax Act, 1961 : A.Y. 2000-01 : Interest on delayed payment of sale price is part of sale price : It is derived from the industrial undertaking : Is eligible for deduction u/s.80IB.

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Unreported

18 Industrial undertaking : Deduction u/s.80IB of Income-tax
Act, 1961 : A.Y. 2000-01 : Interest on delayed payment of sale price is part of
sale price : It is derived from the industrial undertaking : Is eligible for
deduction u/s.80IB.

[CIT v. Vidyut Corporation (Bom.), ITA(L) No. 2865 of
2009, dated 21-4-2010]

The assessee was engaged in manufacturing electrical fittings
and appliances and was eligible for the deduction u/s.80IB of the Income-tax
Act, 1961. The assessee sells its manufactured products mainly to M/s. Bajaj
Electricals Ltd. Payment is normally made on delivery of goods. In case of delay
the assessee also receives interest for delayed payment. For the A.Y. 2000-01
the Assessing Officer disallowed the claim for deduction u/s.80IB in respect of
interest for delayed payment. The Commissioner and 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) What is received by the assessee from the purchaser is
a component of interest towards delayed payment of the price of the goods
sold, supplied and delivered by the assessee. There can be no dispute about
the position that the price realised by the assessee from the sale of goods
manufactured by the industrial undertaking constitutes a component of the
profits and gains derived from the eligible business. The purchaser, on
account of delay in payment of the sale price also pays to the assessee
interest. This forms a component of the sale price and is paid towards the lag
which has occurred in the payment of the price of the goods sold by the
assessee.

(ii) On these facts, therefore, the payment of interest on
account of the delay in payment of the sale price of the goods supplied by the
undertaking partakes the same nature and character as the sale consideration.
The delayed payment charges consequently satisfy, together with the sale
price, the first degree test which has been laid down by the Supreme Court in
Liberty India v. CIT, 317 ITR 218.”


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