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Category: Direct Taxes

New industrial undertaking in backward areas — Deduction u/s.80HH — In the absence of particulars of outsourcing activity deduction cannot be allowed.

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  1. New industrial undertaking in backward areas — Deduction
    u/s.80HH — In the absence of particulars of outsourcing activity deduction
    cannot be allowed.

[CIT v. R. Pratap, (2009) 310 ITR 405 (SC)]

The Supreme Court was concerned with the case of an
assessee who claimed to be a processor of cashew kernels. The Supreme Court
noted that the said processing consisted of various stages like drying
followed by heating followed by decorticating which resulted in emergence of
the kernel covered by the skin which was ultimately sold. The Supreme Court
observed that if an assessee claims that he is the processor who has
outsourced some of its activities to its sister concern then the nature of the
activity undertaken by the industrial undertaking has got to be demonstrated
by the assessee who claims deduction u/s.80HH(1). The Supreme Court further
observed that the object underlying the enactment of S. 80HH(1) is to
encourage setting up of new industrial undertakings in backward areas. The
Supreme Court noted that in the present case, the assessee who had claimed
deduction had not given any particulars regarding the activity undertaken by
it, the activity outsourced by it to its sister concern, whether those sister
concerns were located in or outside the backward areas, etc. There was no
claim made by the assessee that its sister concerns were its job workers. No
details had been given as to whether after the process stands undertaken by
its sister concerns, whether or not, the material came back to the assessee
for further activities before export. There was no averment that the assessee
was the principal manufacturer. In the circumstances, the Supreme Court held
that the assessee was not entitled to claim the benefit of S. 80HH in the
assessment year in question. The Supreme Court however clarified that the
Department had given the benefit of 20% of the profits vis-à-vis the
number of bags processed in the assessee’s own factory situated/located in the
backward area and to that extent the findings given by the Assessing Officer
as well as by the Commissioner of Income-tax (Appeals) remained undisturbed.



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Industrial undertaking — Deduction u/s. 80-I — To determine whether manufacturing is carried out in the industrial undertaking, assessee should place all the relevant material before the Tribunal which is the highest fact finding authority — Whether the a

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  1. Industrial undertaking — Deduction u/s. 80-I — To determine
    whether manufacturing is carried out in the industrial undertaking, assessee
    should place all the relevant material before the Tribunal which is the
    highest fact finding authority — Whether the activity of supply of ammonia gas
    to heavy water plant and return of the same after extracting deuterium
    amounted to manufacture — Matter remanded.

[Krishak Bharati Co-op. Ltd. v. Jt. CIT, (2009) 310
ITR 400 (SC)]

The appellant, a multi-state co-operative society engaged
in the business of manufacturing urea and ammonia at its plant at Hazira, used
to supply ammonia gas through pipe connections from its plant at Hazira
directly to the heavy water plant (HWP) of the Heavy Water Board (HWB),
which is a Department of Atomic Energy. The HWP was located next to the
appellant’s plant. In fact, it was in the precincts of the appellant’s plant.

On September 14, 1994, an agreement came to be executed
between the appellant and HWB. Under that agreement, the appellant was
entitled to be reimbursed the cost of ammonia manufactured by it and supplied
to the Board and in addition thereto it was also entitled to receive service
charges and incentives from HWB.

In respect of the assessment year 1993-94, the Commissioner
of Income-tax (Appeals) held that since the receipt of service charges was not
directly connected or linked with the manufacturing activity carried out in
the industrial undertaking of the assessee, the service charges received by
the assessee from the said activity of producing heavy water cannot be
considered as profit derived from its industrial undertaking so as to qualify
for deduction u/s.80-I of the Act.

This view of the Commissioner of Income-tax (Appeals) was
affirmed by the judgment of the Tribunal as well as by that of the Delhi High
Court.

The Supreme Court at the outset, noted the brief process of
manufacturing heavy water. Heavy water is employed as a coolant in pressurised
heavy water nuclear reactors. Synthesis gas is produced at the ammonia plant
of the appellant. It contains deuterium. Synthesis gas containing deuterium is
taken to heavy water plant, where deuterium is extracted in extraction towers
and the balance synthesis gas is returned to the ammonia plant of the
appellant. The Supreme Court observed that the appellant’s plant which is
known as ammonia plant from which synthesis gas flows to HWP at Hazira owned
by the Department of Atomic Energy and which is known as Hazira Ammonia
Extension Plant (‘HAEP’). HAEP is an extension of the ammonia plant. According
to the Supreme Court this aspect was important for deciding the appeal before
it as it indicated the inseverability between the two plants.

The Supreme Court further observed that unfortunately, in
this case, the appellant herein had failed to place before the Tribunal, which
is the highest fact finding authority under the Act, the relevant contracts
and other data. In fact, the appellant had failed to produce the relevant
contracts and the connected data before the Tribunal. The Supreme Court
therefore, held that there was no fault with the impugned judgment of the High
Court. Normally, it would have dismissed this civil appeal for lack of due
diligence. However, looking to the importance of the matter and in view of
special features of the contract, Supreme Court decided to entertain the civil
appeal by grant of special leave. The Supreme Court noted that in this case,
the appellant had placed reliance only on an agreement dated September 14,
1994, for operation and maintenance of heavy water plant at Hazira. They had
failed to produce the contracts dated August 5, 1986, and July 11, 1990.
According to the Supreme Court the exact meaning of the manufacturing carried
out in the industrial undertaking of the appellant required in-depth
examination.

The Supreme Court held that as the appellant had failed to
produce relevant data before the authorities below it was permitted to do so,
subject to the payment cost of Rs.25,000 as a condition precedent to the
hearing of the appeal by the Tribunal.

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S. 54B : Tube wells and trees are part of the agricultural land for the relief.

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31 Capital gains : Exemption u/s.54B of Income-tax Act,
1961 : A.Y. 1978-79 : Notification for acquisition of agricultural land on
14-1-1977 and 12-5-1977 : Possession of land taken on 26-6-1977. Purchase of
agricultural land with wells and trees on 15-6-1979 : Assessee entitled to
deduction u/s.54B : Deduction available on cost of wells and trees also.



[CIT v. Janardhan Das, 299 ITR 210 (All)]

The assessee’s agricultural land was acquired by the
Government by issuing Notifications dated 14-1-1977 and 12-5-1977. The
possession of the land was taken on 26-6-1977 : The assessee purchased
agricultural land with tubewells and trees on 15-6-1979. The assessee’s claim
for deduction u/s.54B was rejected by the AO on the ground that the purchase
of the agricultural land was beyond the period of two years. The Tribunal
allowed the claim. Since the agricultural land contained tubewells and
standing trees, the Department contended that the value of the tubewells and
the standing trees should be deducted from the total investment made by the
assessee in purchasing the agricultural land. The Tribunal rejected the claim
of the Revenue.

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

“(i) The assessee was an agriculturist and he received
the initial compensation on 12-7-1977, and having invested the compensation
within two years from that date, was entitled to get the benefit of S. 54B.

(ii) The tubewells and trees were part of the
agricultural land purchased by the assessee and their value could not be
deducted from the total investment made by the assessee in the purchase of
the agricultural land.”

 


 


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S. 153 : Exclusion of period during which assessment proceedings are stayed: Does not include the period during which the order transferring the case is stayed.

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30 Assessment : Limitation : Computation of
period : S. 153 of Income-tax Act, 1961 : A.Y. 1986-87 : Exclusion of period
during which assessment proceedings are stayed : Does not include the period
during which the order transferring the case is stayed : Suspension of order
transferring the case does not amount to stay of assessment proceedings.


[CIT v. V. K. Ferro Alloys Industries P. Ltd., 299 ITR
191 (AP)]

For the A.Y. 1986-87, the assessee’s case was transferred
from Hyderabad to Visakhapatnam on 1-8-1988. On a writ petition filed by the
assessee, the High Court suspended the order of transfer till further orders.
Despite the interim order of the Court, the AO of Visakhapatnam completed the
assessment ex-parte. During the pendency of the appeal by the assessee,
the Court quashed the transfer order. As a result, the Commissioner (Appeals)
Visakhapatnam set aside the assessment order of the AO at Visakhapatnam with a
direction for de novo consideration by the appropriate Assessing
Authority. The case was transferred back to Hyderabad. Subsequently, the AO at
Hyderabad completed the assessment u/s.144. The assessee contended that the
assessment was barred by limitation. The Tribunal accepted the claim.

In the appeal preferred by the Revenue, the Revenue contended
that for computing the period of limitation, the provisions of Explanation 1(ii)
to S. 153(3) will have to be applied and the period during which the transfer
order was suspended by the Court has to be excluded.

The Andhra Pradesh High Court rejected the contention of the
Revenue and held as under :

“The order transferring the case was suspended and not the
assessment proceedings themselves. Explanation 1(ii) to S. 153(3) had no
application to the case on hand as the interim order of the Court did not
amount to stay of assessment proceedings.”

However, the High Court upheld the validity of the assessment
order on the ground of limitation based on the direction of the Commissioner
(Appeals) Visakapatnam while setting aside the assessment.

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Salary : Profit in lieu of salary : S. 17(3) : In order to characterise a particular payment received from an employer on termination of employment as ‘profit in lieu of salary’, it has necessarily to be shown that said amount is due or received as ‘compe

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40. Salary : Profit in lieu
of salary : S. 17(3) of Income-tax Act, 1961 : A.Y. 2001-02 : In order to
characterise a particular payment received from an employer on termination of
employment as ‘profit in lieu of salary’, it has necessarily to be shown that
said amount is due or received as ‘compensation’ : If payment is made as ex
gratia or voluntary by the employer out of his own sweet will and is not
conditioned by any legal duty or legal obligation, such payment is not to be
treated as ‘profit in lieu of salary’ u/s.17(3)(i).


[CIT v. Deepak Verma,
194 Taxman 265 (Del.)]

At the time of his
retirement, the assessee had received certain payment from his employer in
addition to normal benefits. The employer had deducted the tax at source on that
amount also. In the assessment proceedings for the A.Y. 2001-02, the assessee
claimed that the said amount was not exigible to tax being an ex gratia payment
which was outside the scope and ambit of S. 17(3). The Assessing Officer held
that the said payment was made as ‘compensation’ for his services and,
therefore, was liable to tax u/s.17(3)(i). The Tribunal deleted the addition
holding that it was not chargeable to tax u/s.17(3)(i) as ‘profit in lieu of
salary’.

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

“(i) Though sub-clause
(iii) squarely covered the nature of payment received by the assessee, that
did not exist in the relevant assessment year and was incorporated only with
effect from 1-4-2002. Therefore, that provision was not applicable to the
instant case.

(ii) Under sub-clause (i),
in order to characterise a particular payment received from the employer, on
termination of the employment, as ‘profit in lieu of salary’, it has
necessarily to be shown that this amount is due or is received as
‘compensation’.

(iii) When the payment is
to be received as ‘compensation’, the employee would have a right to receive
such a payment. If the employee has no right, it cannot be treated as a
‘compensation’. It is for this reason that if the payment is made as ex gratia
or voluntary by an employer out of his own sweet will and is not conditioned
by any legal duty or legal obligation, whether on sympathetic reasons or
otherwise, such payment is not to be treated as ‘profit in lieu of salary’
under sub-clause (i).

(iv) In the instant case,
all dues admissible to the assessee on his resignation were otherwise paid by
the employer to him. In addition, the employer agreed to pay ‘in its
discretion’ certain amount as an ‘exceptionable’ and ‘one off ex gratia
payment’. It was very clearly stated in the letter of the employer that
management had agreed to pay that amount in its discretion. It was not
compelled by any obligation to pay that amount which would assume the nature
of any ‘compensation’. The amount was also described as not only exceptionable
but ex gratia. It, therefore, clearly partook the character of voluntary
payment and could not be termed as a payment by way of ‘compensation’.
Therefore, the receipt of that payment by the assessee would not be covered
under sub-clause (i) of clause (3) of S. 17.

(v) Thus, the amount received by the
assessee was not ‘profit in lieu of salary’ and, therefore, was not an income
exigible to tax.”

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S. 260A : Territorial jurisdiction to be determined on the basis of place of passing assessment order and not on basis of Assessing Officer exercising jurisdiction over assessee after transfer of case.

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29 Appeal to High Court u/s.260A of
Income-tax Act, 1961 : Territorial jurisdiction : Jurisdiction is to be
determined on the basis of place of passing assessment order and not on basis of
Assessing Officer who exercises jurisdiction over assessee after transfer of the
case.


[CIT v. Motorola India Ltd., 168 Taxman 1 (P&H)]

For the A.Y. 1996-97, the AO (Bangalore) completed the
assessment of the assessee. The Commissioner (Bangalore) passed an order u/s.263
of the Income-tax Act, 1961, setting aside the assessment order holding that it
was erroneous and prejudicial to the interest of the Revenue and directed to
pass fresh assessment order in accordance with the directions. The Tribunal
(Bangalore) vacated the order of the Commissioner. In the meanwhile, the case of
the assessee was transferred from AO at Bangalore to the AO at Gurgaon. Against
the order of the Tribunal the Revenue preferred an appeal u/s.260A of the Act in
the Punjab and Haryana High Court. The assessee raised preliminary objection
that the jurisdiction u/s.260A lies with the Bangalore High Court and not the
Punjab and Haryana High Court.

The P&H High Court agreed with the preliminary objection of
the assessee and held that the jurisdiction of the Court is to be determined on
the basis of place of passing of assessment order by the AO, and not on the
basis of AO who exercises jurisdiction over assessee after transfer of the case.
Accordingly, the P&H High Court dismissed the appeal on the ground that it had
no territorial jurisdiction over an order passed by the AO at Bangalore.

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TDS:Paymentstocontractors/sub-contractors: S. 194C : Assessee is a society constituted by truck operators : It entered into contracts with companies for carriage of goods by its members : Companies deducted tax at source from payments made to assessee : A

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39. TDS : Payments to
contractors/sub-contractors : S. 194C of Income-tax Act, 1961 : Assessee is a
society constituted by truck operators : It entered into contracts with
companies for carriage of goods by its members : Those companies deducted tax at
source from payments made to assessee : Assessee paid entire amount received by
it to its members, who had actually carried goods, after deducting a nominal
amount towards administrative expenses : Members not sub-contractors of assessee.
Assessee not liable to deduct tax at source on payments so made to respective
members.


[CIT v. Sirmour Truck
Operators Union, 195 Taxman 62 (HP)]

The assessee-society was
constituted by the truck operators. It entered into contracts with companies for
carriage of goods. Those companies deducted 2% of the amount paid to the
assessee on account of TDS in terms of S. 194C(1). The assessee-society paid the
entire amount received by it to its members, who had actually carried the goods,
after deducting a nominal amount of Rs. 10 or Rs.20 for administrative expenses
of running of the society. The Assessing Officer held that the assessee was
liable to deduct tax at source at the rate of 1% from the amount paid to the
members/truck operators in terms of S. 194C(2). The Tribunal held that the
provision of S. 194C(2) was not attracted, since there was no sub-contract
between the assessee-society and its members.

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




“(i) It was urged on behalf of the Revenue
that since the assessee, being a person was paying a sum to the members-truck
operators’ who were resident within the meaning of the Act, TDS was required
to be deducted. That argument did not take into consideration the heading of
the Section and the entire language of S. 194C(2) which clearly indicates that
the payment should be made to the resident who is a sub-contractor.

(ii) The concept of
sub-contract is intrinsically linked with S. 194C(2). If there is no
sub-contract, then the person is not liable to deduct tax at source, even if
payment is being made to a resident. To understand the nature of the contract,
it would be relevant to mention that in the instant case the assessee-society
was created by the transporters themselves. The transporters formed the
society or union with a view to enter into a contract with the companies. The
companies entered into contract for transportation of goods and materials with
the society. However, the society was nothing more than a conglomeration of
the truck operators themselves. The assessee-society had been created only
with a view to make it easy to enter into a contract with the companies as
also to ensure that the work to the individual truck operator was given
strictly in turn so that every truck operator had an equal opportunity to
carry the goods and to earn income.

(iii) The society itself
did not do the work of transportation. The members of the society were
virtually the owners of the society. A finding of fact had been rendered by
the authorities that the societies were formed with a view to obtain the work
of carriage from the company, since the companies were not ready to enter into
a contract with the individual truck operator but had asked them to form a
society.

(iv) Admittedly, the
society did not retain any profits. It only retained a nominal amount as
‘parchi charge’ which was used for meeting the administrative expenses of the
society. There was no sub-contract between the society and the members.

(v) In fact, if the entire
working of the society was seen, it was apparent that the society had entered
into a contract on behalf of the members. The society was nothing but a
collective name of all the members and the contract entered into by the
society was for the benefit of the constituent members and there was no
contract between the society and the members.

(vi) For the foregoing
reasons, S. 194C(2) was not attracted and the assessee-society was not liable
to deduct tax at source on account of payments made to the truck owners, who
were also members of the society.”


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Revision : S. 264 : S. 10(26AAA) was introduced by Finance Act, 2008 with retrospective effect from 1-4-1990 after completion of assessment for relevant years : Assessee’s application u/s.264 for relief under new Section with application for condonation

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38. Revision : S. 264 of
Income-tax Act, 1961 : A.Ys. 1997-98 to 2005-06 : S. 10(26AAA) was introduced by
Finance Act, 2008 with retrospective effect from 1-4-1990 after completion of
assessment for relevant years : Assessee’s application u/s.264 for relief under
new Section with application for condonation of delay should be allowed.


[Danny Denzongpa v. CIT,
194 Taxman 415 (Bom.)]

The assessee was an Indian
national of Sikkimese origin. For the relevant assessment years, his
assessments had been completed. Thereafter,
S. 10(26AAA) was introduced by the Finance Act, 2008 with retrospective effect
from 1-4-1990. The assessee was entitled to benefit under the new S. 10(26AAA).
Therefore, for the A.Ys. 1997-98 to 2005-06, the
assessee made an applications for revision u/s.264 of the Income-tax Act, 1961
to the Commissioner on 4-9-2008 with the application for condonation of delay
for grant of relief under the new S. 10(26AAA). The Commissioner rejected the
applications on the ground that those have been filed beyond the time limit
prescribed in the Act.

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

“(i) A reading of S.
264(6) discloses that if the assessee had been prevented by sufficient cause
from making the application within the period prescribed and the Commissioner
is satisfied with the reasons given by the assessee for not filing the said
application within the period prescribed, he may admit the application made
after expiry of the period. Indubitably, in the instant case, the application
u/s.264 came to be filed by the assessee on account of the introduction of S.
10(26AAA) which came into operation with retrospective effect from 1-4-1990.
By the said provision, the assessee, who was Sikkimese by origin, was entitled
to certain benefits. Obviously there seems to be a rationale in introducing
the said provisions as the Government was of the view that the said benefit is
required to be granted for the upliftment of the people of Sikkimese origin.

(ii) There can be no
dispute that the Finance Act, by which the said provision was introduced,
received the assent of the President on 10-5-2008. The assessee had made an
application immediately after a period of four months of the said Finance Act
receiving assent of the President. The reasons as to why the assessee did file
the applications at the said point of time, had been mentioned by him in the
applications for each of the assessment years. However, as could be seen from
the impugned order, the Commissioner had not even adverted to the reasons
mentioned by the assessee in the application for condonation of delay and had,
in a cryptic manner, rejected the said application by observing that he was
unable to entertain the assessee’s petitions beyond the time limit prescribed.

(iii) Once the
Commissioner is vested with the power of condonation of delay, then it is
incumbent upon him to take into consideration the reasons mentioned by the
assessee seeking condonation of the delay. A reading of the impugned order,
however, did not indicate that the reasons mentioned by the assessee had been
considered. In fact, the said reasons had not even been adverted to by the
Commissioner.

(iv) In matters of this
kind, wherein a benefit is sought to be given to an assessee, that too with a
retrospective effect, a highly technical and pedantic approach is required to
be eschewed and one which furthers the intent and purport of the legislation
is required to be adopted.

(v) Though in the normal
circumstances, for the reasons mentioned hereinabove, we would have set aside
the orders and remanded the matter back to the Commissioner for a de novo
consideration, however, for the reasons which we have mentioned hereinabove,
we do not deem it appropriate to do so and, therefore, allow these petitions
by making the Rule absolute in terms of prayer clauses (a) and (b)”.

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Recovery of tax : Garnishee proceedings : S. 226(3)(iii) : Attachment and appropriation of sum in bank account : Notice to assessee prior to attachment mandatory : Appropriation of sum in bank account without notice to assessee and while stay application

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37. Recovery of tax :
Garnishee proceedings : S. 226(3)(iii) of Income-tax Act, 1961 : A.Y. 2007-08 :
Attachment and appropriation of sum in bank account : Notice to assessee prior
to attachment mandatory : Appropriation of sum in bank account without notice to
assessee and while stay application pending before Appellate Authority is not
proper.


[Purnima Das v. UOI,
329 ITR 278 (Cal.)]

For the A.Y. 2007-08, the
assessee had preferred appeal before the Commissioner (Appeals) against the
assessment order and had also made an application for stay of the demand
u/s.220(6) of the Income-tax Act, 1961. The appeal and the application for stay
were pending. The assessee was served with notices of attachment in respect of
the demand. Thereafter, by issue of garnishee notice u/s.226(3) of the Act a sum
of Rs.1,66,000 was appropriated by the Department towards the demand from the
current account maintained with the bank by a firm of which the assessee was a
partner.

The Calcutta High Court
allowed the writ petition challenging the action and held as under :

“(i) Service of notice
prior to attachment is mandatory as evident from the language of S.
226(3)(iii) of the Income-tax Act, 1961. S. 226(3)(iii) of the Act stipulates
that a copy of the notice shall be forwarded to the assessee at his last
address known to the Assessing Officer. Therefore, it was not proper on the
part of the Assessing Officer to attach and debit a sum without serving a copy
of the notice of attachment on the assessee. The contention that actual
service of notice of attachment was not necessary could not be accepted since
the use of the word ‘shall’ in S. 226(3)(iii) mandates that such notice has to
be served before action is taken.

(ii) Moreover, the
assessee had filed an application for stay indicating that an appeal had been
filed against the assessment order in question. Once the factum of filing
appeal is made known to the Assessing Officer, he ought to have disposed of
the stay application without proceeding further with the attachment notices.

(iii) That apart, the
Assessing Officer did not exercise his discretion judiciously, rather there
was total non-application of mind.”

The High Court directed the
Assessing Officer to credit the said sum of Rs.1,66,000 to the respective
account of the firm in the bank within two weeks. The High Court also awarded
the cost of Rs.1,700 to the petitioner payable by the Department.

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MAT : S. 115JA and S. 115JB : S. 115JA and S. 115JB are not applicable to State Electricity Board.

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36. MAT : S. 115JA and S.
115JB of Income-tax Act, 1961 : A.Ys. 2002-03 to 2005-06 : S. 115JA and S. 115JB
are not applicable to State Electricity Board.


[Kerala State Electricity
Board v. Dy. CIT, 329 ITR 91 (Ker.)]

Dealing with the scope of S.
115JA and S. 115JB of the Income-tax Act, 1961, the Kerala High Court has held
as under :

“(i) S. 115JB of the
Income-tax Act, 1961 creates a legal fiction regarding total income of
assessees which are companies. Though the Kerala State Electricity Board, a
statutory corporation constituted by virtue of S. 5 of the Electricity
(Supply) Act, 1948 answers the description of an Indian company and therefore
a company within the meaning of S. 2(17) of the Income-tax Act, 1961, it is
not a company for the purposes of the Companies Act, 1956.

(ii) At the earliest point
of time when S. 115J was introduced, the Section expressly excluded from its
operation bodies like the Electricity Board. Though such express exclusion is
absent in S. 115JA, the CBDT issued Circular No. 762, dated 18-2-1998
excluding bodies like the Electricity Board from operation of the Section.
Such an understanding of the CBDT is binding on the Department. S. 115JB,
which is substantially similar to S. 115JA cannot have a different purpose and
need not be interpreted in a manner different from the understanding of the
CBDT of S. 115JA.

(iii) The Electricity
Board or bodies similar to it, which are totally owned by the Government,
either State or Central, have no share-holders. Profit, if at all, made would
be for the benefit of entire body politic of the State. Therefore the enquiry
as to the mischief sought to be remedied by the amendment becomes irrelevant.
Therefore, the fiction fixed by S. 115JB cannot be pressed into service
against the Electricity Board while making the assessment of tax payable under
the Income-tax Act.”

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35.ducational institution : Exemption u/s. 10(23C)(vi) : Capital assets acquired/constructed by educational institutions cannot be treated as income in a blanket manner without recording a finding whether capital assets have been applied and utilised to a

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35. Educational institution
: Exemption u/s. 10(23C)(vi) of Income-tax Act, 1961 : A.Ys. 2007-08 to
2010-2011 : Capital assets acquired/constructed by educational institutions
cannot be treated as income in a blanket manner without recording a finding
whether capital assets have been applied and utilised to advance purpose of
education : Advancement of loans to employees cannot be regarded as
misapplication of funds : Remuneration paid to directors or teachers of school,
in their capacity as employees would be considered to be paid for educational
purposes.

[Kashatriya Sabha
Maharana Partap Bhavan v. UOI, 194 Taxman 442 (P&H)]

The assessees were
educational societies claiming to exist solely for educational purposes. Their
applications for grant/renewal of approval for exemption u/s.10(23C)(vi) of the
Income-tax Act, 1961 for the relevant assessment years were rejected by the
Chief Commissioner on the grounds that they were generating substantial surplus
year after year and their incomes were not being utilised exclusively for
educational purposes. In some of the cases, the Chief Commissioner denied
exemption on the ground that the society had advanced a loan to the principal of
the school and members of the society; and that the society was paying salaries
to its members.


The Punjab and Haryana High
Court allowed the writ petitions filed by the assessees and relying on its
judgment in the case of Pinegrove International Charitable Trust v. UOI, 188
Taxman 402 (P&H) held as under :



“(i) When the facts of the
instant cases were examined in the light of the above discussion, the first
thing which became evident is that in the instant cases capital assets
acquired/constructed by the educational institutions had been treated as
incomes in a blanket manner without recording any finding whether the capital
assets had been applied and utilised to advance the purpose of education. It
is obligatory on the part of the prescribed authority, while considering the
application for grant of exemption, to decide whether expenditure incurred as
capital investment is on the object of education or not.


(ii) In all the instant
cases, the impugned orders passed by the Chief Commissioners were similar in
substance and appeared to have been inspired by the view taken by the
Uttarakhand High Court in the case of Queens Educational Society (supra),
which had not been accepted in the judgment rendered in the case of Pinegrove
International Charitable Trust’s case (supra).


(iii) The competent
authority was also required to consider the question of advancement of loans
to the employees of the college, which were given to the principal of the
institution, in its proper perspective. The advancement of loans to the
employees of the institution cannot be regarded as mis-application of funds
because good service conditions for its employees would always attract
talented persons to an educational institution. If facilities like housing
loan, car loan, etc., which are prevalent in the public sector and the
Government institutions, are given, then necessarily it would be regarded as
an expenditure spent on the objects of the education and not for any other
purpose.


(iv) Likewise, it would be
a relevant factor if any institution had enjoyed exemption for the last 2½
decades. The competent authority should have recorded findings of fact insofar
as remuneration paid to director of the school and to his wife, who was
teacher in the school, was concerned. If the remuneration had been paid in
their capacity as employees rendering the service to the school as director or
teacher, then it would be proper to interpret the same to be for education
purpose. But if the remuneration had been paid farcically, then the payments
made to such persons must be reckoned to have been spent on a purpose other
than for education.


(v) In order to avoid any
reference to all individual cases, it would suffice to mention that the
competent authorities should not have read the judgment of the Uttarakhand
High Court in the case of Queens Educational Society (supra) like a statute.


(vi) As a sequel to the
aforesaid discussion, the petitions were to be allowed and the impugned orders
passed by the Chief Commissioners refusing to grant exemption u/s. 10(23C)(vi)
or to renew the same were to be quashed.”

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Loss return : Delay in filing : Condonation of delay : CBDT : S. 119 : Assessee a multi-state co-operative bank : Loss return filed belatedly : Delay on account of delay in appointing statutory auditor by Central Registrar and subsequent delay in completi

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34. Loss return : Delay in
filing : Condonation of delay : CBDT : S. 119 of Income-tax Act, 1961 : A.Y.
2001-02 : Assessee is a multi-state co-operative bank : Loss return filed
belatedly : Delay on account of delay in appointing statutory auditor by Central
Registrar and subsequent delay in completing audit.


[Bombay Mercantile
Co-operative Bank v. CBDT, 195 Taxman 106 (Bom.)]

The assessee was a
multi-state co-operative bank. For the A.Y. 2001-02, it filed loss return after
the statutory audit was completed on 15-11-2001 and the audit u/s.44AB of the
Income-tax Act, 1961 was completed on 28-11-2001. In view of the delay in filing
the return, the assessee had filed an application u/s.119(2)(b) for condonation
of the delay in filing the return. The reason for delay was that the statutory
auditors were appointed by the Commissioner of Corporation and the Registrar of
Co-operative Societies on 3-9-2001 and the said statutory auditors were able to
complete the audit only on 15-11-2001 and the audit u/s.44AB was completed on
28-11-2001; and that the return of income was filed on the very next day. The
CBDT rejected the said application for condonation of delay on the ground that
the assessee-bank had been operating for the several years and was, therefore,
aware of its statutory obligation u/s. 44AB, so as to get its accounts audited
within specified time to file the return of income within due date.

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

“(i) The assessee was a
multi-state co-operative bank operating under the Multi-State Co-operative
Societies Act, 1984. The power to appoint the statutory auditors was that of
the Central Registrar, who was the Registrar of the Co-operative Societies,
Maharashtra State. The said authority had appointed the statutory auditors on
3-9-2001. It appeared that the said authority appointed chartered accountants
to be statutory auditors in place of the departmental auditors. That change
was made in respect of all the societies. Therefore, the assessee could not be
blamed for the delay in carrying out its audit, as the same was beyond its
control.

(ii) The contention of the
Revenue that the departmental auditors, in fact, had started the audit in the
year 2000 and it was for the assessee to get the audit expedited, could not be
accepted. Though the departmental auditors might have started the audit, it
appeared that pursuant to the said policy decision taken, the departmental
auditors were replaced by the chartered accountants to be the statutory
auditors, which was by letter dated 3-9-2001. Therefore, the said reason
mentioned by the assessee in its application deserved to be accepted.

(iii) The other reasons
cited for condonation of delay, therefore, did not need be gone into as the
assessee would be entitled to condonation of the delay on the said ground
alone.

(iv) It is well settled
that in matters of condonation of delay, a highly pedantic approach should be
eschewed and a justice-oriented approach should be adopted. A party should not
be made to suffer on account of technicalities.

(v) In that view of the
matter, the petition was required to be allowed. The impugned order was
required to be set aside and, resultantly, the delay in filing the return
would stand condoned and the assessee would be entitled to the carry forward
and set off of losses in accordance with law.”

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Business expenditure : Deduction only on actual payment : Disallowance u/s.43B : Electricity Board collecting electricity duty from customers as agent of State : S. 43B not applicable to Electricity Board.

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32. Business expenditure :
Deduction only on actual payment : Disallowance u/s.43B of Income-tax Act, 1961
: A.Ys. 2002-03 to 2005-06 : Electricity Board collecting electricity duty from
customers as agent of State : S. 43B not applicable to Electricity Board.


[Kerala State Electricity
Board v. Dy. CIT, 329 ITR 91 (Ker.)]

In the relevant years, the
Assessing Officer made disallowances u/s.43B of the Income-tax Act, 1961 in
respect of the electricity duty collected by the assessee Electricity Board and
paid to the Government as the agent of the Government. The disallowance was
confirmed by the Tribunal.

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

“(i) On a plain reading of
S. 43B, we are of the opinion that the only clause, if at all relevant in the
context of the facts of the appellant’s case is clause (a) which deals with
“any sum payable by the assessee by way of tax, duty, . . . . . under any law
for the time being in force”. In our opinion, the words ‘by way of tax’ are
relevant as they are indicative of the nature of liability. The liability to
pay and the corresponding authority of the State to collect the tax (flowing
from a statute) is essentially in the realm of the rights of the sovereign,
whereas the obligation of the agent to account for and pay the amounts
collected by him on behalf of the principal is purely fiduciary.

(ii) The nature of the
obligation, in our opinion continues to be fiduciary even in a case wherein
the relationship of the principal and agent is created by a statute. We are of
the opinion that when S. 43B(a) speaks of a sum payable by way of tax, etc.,
the said provision is dealing with the amounts payable to the sovereign qua
sovereign, but not the amounts payable to the sovereign qua principal.

(iii) We are, therefore,
of the opinion that S. 43B cannot be invoked in making the assessment of the
liability of the appellant under the Income-tax Act with regard to the amounts
collected by the appellant pursuant to the obligation cast on the appellant
u/s.5 of the Kerala Electricity Duty Act, 1963.”

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Capital gains : Long-term or short-term : S. 2(29A) r/w S. 54 : DDA allotted a flat to assessee under its scheme on 27-2-1982 : Possession of flat given to assessee on 15-5-1986 when actual flat number was allocated to assessee : Assessee sold said flat o

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33. Capital gains :
Long-term or short-term : S. 2(29A) r/w S. 54 of Income-tax Act, 1961 : A.Y.
1998-99 : DDA allotted a flat to assessee under its scheme on 27-2-1982 :
Possession of flat given to assessee on 15-5-1986 when actual flat number was
allocated to assessee : Assessee sold said flat on 6-1-1989 : Capital gain is
long-term.


[Vinod Kumar Jain v. CIT,
195 Taxman 174 (P&H)]

The assessee was allotted a
flat on 27-2-1982 on instalments under residential scheme of the DDA. The
possession of the said flat was, however, given to the assessee on 15-5-1986 and
the letter issued in that behalf indicated the flat number and called upon the
assessee-allottee to deposit the balance amount. The assessee sold the said flat
on 6-1-1989 and claimed that capital gain arising on sale of said flat was
long-term capital gain. The assessee had also claimed exemption u/s.54 on
account of purchase of another flat on 31-1-1989. The Assessing Officer
disallowed the assessee’s claim holding that the possession of the flat was
given to the assessee on 15-5-1986 and, therefore, the capital gain on sale of
the flat in question was short-term capital gain governed by S. 2(42A). The
Tribunal upheld the decision of the AO.

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

“(i) A conjoint reading of
S. 2(14), S. 2(29A) and S. 2(42A) leads to one conclusion that a capital asset
held by the assessee for 36 months would be termed as a long-term capital
asset and any gain arising on account of sale thereof would constitute a
long-term capital gain.

(ii) Circular No. 471,
dated 15-10-1996 issued by the CBDT, on which heavy reliance had been placed
by the assessee, describes the nature of right that an allottee acquires on
allotment of a flat under self-financing scheme. According to it, the allottee
gets title to the property on the issuance of an allotment letter and the
payment of instalments is only a consequential action upon which the delivery
of possession flows.

(iii) The provisions of S.
2(14), S. 2(29A) and S. 2(42A) encompass within their ambit those cases of
capital assets which are held by an assessee. Once that is so, adverting to
the facts of the instant case, the assessee was allotted a flat on 27-2-1982
on payment of instalments by issuance of an allotment letter and he had been
making payment in terms thereof, but the specific number of the flat was
allocated to the assessee and possession delivered on 15-5-1986. The right of
the assessee prior to 15-5-1996 was a right in the property. In such a
situation, it could not be held that prior to the said date, the assessee was
not holding the flat.

(iv) Accordingly, capital
gain arising on sale of flat was a long-term capital gain and the assessee was
entitled to set off the same u/s.54.”

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Appeal to High Court : Power of review : High Court can review its order u/s.260A of the Income-tax Act, 1961.

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31. Appeal to High Court :
Power of review : S. 260A of Income-tax Act, 1961 : High Court can review its
order u/s.260A of the Income-tax Act, 1961.


[D. N. Singh v. CIT,
194 Taxman 273 (Pat) (FB); 325 ITR 349 (Pat) (FB); 235 CTR 177 (Pat) (FB).]

In this case, relying on the
judgment of the Supreme Court in Commissioner of Customs and Central Excise v.
Hongo India (P) Ltd., the Full Bench of the Patna High Court has held that the
High Court can entertain application for review arising out of judgment passed
u/s.260A of the Income-tax Act, 1961.

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Industrial undertaking: Deduction u/s. 80IB of I. T. Act, 1961: A Y 2002-03: Deduction allowable in respect of exchange rate difference:

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Unreported :

41 Industrial undertaking: Deduction u/s. 80IB of I. T. Act,
1961: A Y 2002-03: Deduction allowable in respect of exchange rate difference:


CIT Vs. M/s. Rachna Udyog (Bom); ITA No. 2394 of 2009 dated
13/01/2010:

The assessee’s industrial undertaking was entitled to
deduction u/s. 80IB of the Income-tax Act, 1961. The Tribunal had allowed the
deduction in respect of (1) Duty drawback; (2) Export entitlement; (3) DEPB
licence, and (4) Exchange rate difference.

In an appeal by the Revenue, the Bombay High Court set aside
the order of the Tribunal as regards the first three items, in view of the
judgment of the Supreme Court in Liberty India Vs. CIT; (2009) 317 ITR 218 (SC).
And as regards the fourth item, the Bombay High Court held as below:

“i) In so far as the question of difference in the rate of
exchange is concerned, the submission of the assessee before the Assessing
Officer was that exchange rate fluctuation forms a part of the sale proceeds
eligible for deduction u/s. 80IB. According to the assessee, the receipt was
directly related to the process of carrying on the business of the industrial
undertaking. The export invoices were made in terms of US $. When the sale
proceeds of goods exported are received in India in convertible foreign
exchange, the rupee equivalent of the sale proceeds is liable to vary
consequent to the fluctuations in the rate of foreign exchange between the
date when the goods are exported and the date on which the sale proceeds are
received in India. In other words, it was the contention of the assessee that
the value of the goods exported remains the same but the rupee equivalent is
liable to vary due to fluctuation in the rate of foreign exchange.
Consequently, a book entry is made in order to ensure that the rupee
equivalent of the value of the goods exported out of India is correctly
reflected in the books of account, since the books are maintained in rupee
terms.

ii) We are of the view that the difference on account of
exchange rate fluctuation is liable to be allowed u/s. 80IB. The exchange rate
fluctuation arises out of and is directly related to the sale transaction
involving the export of goods of the industrial undertaking. The exchange rate
fluctuation between the rupee equivalent of the value of the goods exported
and the actual receipts which are realized arises on account of the sale
transaction. The difference arises purely as a result of a fluctuation in the
rate of exchange between the date of export and the date of receipt of
proceeds, since there is no variation in the sale price under the contract.

iii) In the circumstances, we would affirm the judgment of
the Tribunal in so far as the question of exchange rate fluctuation is
concerned.

 

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Appeal to ITAT by undertaking owned by the government: Approval from the Committee on Disputes not required:

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Unreported :

 


39 Appeal to ITAT by undertaking owned by the government:
Approval from the Committee on Disputes not required:

M/s. Shivshahi Punarvasan Prakalp Ltd. Vs. UOI (Bom); W. P. No. 2270 of
2009 dated 05/01/2010:


The petitioner is an undertaking owned by the Government of
Maharashtra. The Income Tax Appellate Tribunal dismissed the appeal filed by the
petitioner on the ground that no approval was obtained of the Committee on
Disputes constituted in pursuance of the judgment of the Supreme Court in ONGC
Vs CCE (1992 Suppl (2) SCC 432).

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

“i) The Counsel appearing on behalf of the Revenue has
stated before the court that it was not, and is not the contention of the
Revenue that the approval of the Committee on Disputes was required in order
to prefer an appeal before the Income Tax Appellate Tribunal in a matter
relating to an adjudication of dispute relating to exaction of revenue under
the Income-tax Act, 1961. The learned counsel appearing on behalf of the
assessee has also adopted the same contention. In that view of the matter, the
basis on which the Tribunal dismissed the appeal, namely, on the footing that
approval had to be obtained from the Committee on Disputes appears to be
fallacious.

ii) During the course of this proceeding, we have requested
the Additional Solicitor General to assist the court. The Additional Solicitor
General states that the Union of India would be ready and willing to
constitute a committee to look into a dispute between the central government
and state government entities, on a case to case basis, if so directed by the
court; but this would not be necessary in a matter such as the present which
relates to the adjudication of a dispute under the Income-tax Act, 1961.

iii) Since we have come to the conclusion that the basis on
which the appeal was dismissed by the Tribunal was erroneous, it would be only
appropriate and proper to set aside the order of the Tribunal in order to
facilitate adjudication on merits. In the circumstances, the order of the
Tribunal is restored to the file of the Tribunal for a decision on its
merits.”

 


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Capital gain or business income: Rule of consistency: Profit on sale of shares taken as capital gain in past: Assessment of such profit as business income in the relevant year as business income: Not just:

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In The High Courts

K. B. Bhujle
Advocate


Unreported :



40 Capital gain or business income: Rule of consistency:
Profit on sale of shares taken as capital gain in past: Assessment of such
profit as business income in the relevant year as business income: Not just:

CIT Vs. Gopal Purohit (Bom); ITA No. 1121 of 2009 dated
06/01/2010:

In an appeal u/s. 260A of the Income-tax Act, 1961 by the
Revenue before the Bombay High Court, the following two queries were raised:

"a) Whether, on the facts and circumstances of the case
and in law, the Hon’ble ITAT was justified in treating the income from sale
of 7,59,003 shares for Rs. 5,00,12,879/- as an income from short-term
capital gain, and the sale of 3,88,797 shares for Rs. 6,65,02,340/- as
long-term capital gain, as against the "Income from business" assessed by
the A.O.

b) Whether, on the facts and circumstances of the case
and in law, the Hon’ble ITAT was justified in holding that the principles of
consistency must be applied here as the authorities did not treat the
assessee as a share trader in preceding year, in spite of existence of a
similar transaction, which cannot in any way operate as res judica to
preclude the authorities from holding such transactions as business
activities in current year


The Bombay High Court held as hereunder:


"i) The Tribunal has achieved a pure finding of fact that
the assessee was engaged in two different types of transactions. The first
set of transactions involved investment in shares. The second set of
transactions involved dealing in shares for the purpose of business. The
tribunal has correctly applied the principle of law in accepting the
position that it is open to an assessee maintaining two separate portfolios:
one relating to investment in shares and another relating to business
activities involving dealing in shares. The tribunal held that delivery
based transactions in the present case should be treated as those in the
nature of investment transactions, and the profit received thereof should be
treated either as short-term or, as the case may be, long-term capital gain,
depending on the period of holding. A finding of fact has been arrived at by
the Tribunal as regards the existence of two distinct types of transactions,
namely, those by way of investment on the one hand, and those for the
purposes of business on the other hand. Query (a) above, does not raise any
substantial question of law.

ii) In so far as query (b) is concerned, the Tribunal has
observed in paragraph 8.1 of its judgment that the assessee has followed a
consistent practice with regard to the nature of the activities, the manner
of keeping records and the presentation of shares as investment at the end
of the year, in all the years. The Revenue submitted that a different view
should be taken for the year under consideration, since the principle of res
judicata is not applicable to assessment proceedings. The Tribunal correctly
accepted the position that the principle of res judicata is not attracted
since each assessment year is separate in itself. The Tribunal held that
there ought to be uniformity in treatment and consistency when the facts and
circumstances are identical, particularly in the case of the assessee. This
approach of the Tribunal cannot be faulted. The Revenue did not furnish any
justification for adopting a divergent approach for the assessment year in
question. Query (b), therefore, does not also raise any substantial
question."

 


 



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Liability of Trust : Assessee, a provident fund trust of employees : Assessable in the status of individual : Not liable to TDS u/s.194A

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55 TDS : Liability of Trust : S. 194A of
Income-tax Act, 1961 : A.Ys. 2002-03 to 2005-06 : Assessee Corporation, a
provident fund trust of employees : Assessable in the status of individual : Not
liable to deduct tax at source u/s.194A.



[CIT v. Food Corporation of India Contributory Provident
Fund Trust, 218 CTR 625 (Del.)]

The assessee is a provident fund trust of the employees.
The Assessing Officer found that the amounts being credited to the account of
the ex-employees after cessation of employment, had the character of interest.
The AO held the assessee was required to deduct tax at source u/s.194A of the
Income-tax Act, 1961 on the interest so credited. The assessee having failed
to do so was treated as being in default and demands were raised u/s.201(1) &
201(1A) of the Act. The Tribunal held that the assessee being assessed to tax
in the status of an individual, was not liable to deduct tax at source
u/s.194A and accordingly deleted the demands.

 

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

“Assessee corporation, a provident fund trust of employees
created after seeking exemption u/s. 16 of the Employees Provident Fund Act,
1952, being assessable in the status of individual, was not liable to deduct
tax at source u/s.194A while crediting amounts to the account of
ex-employees.”

Deductibility of additional liability arising on account of exchange rate difference (on revenue account) at the year end

Introduction :

    1.1 With the increase in cross-border transactions in the business, transactions entered into Foreign Currency are required to be reported in Indian Rupees. This raises various accounting and tax issues. Primarily, in most cases, accounting treatment of such transactions is guided by Accounting Standard 11, issued by the Institute of Chartered Accountants of India (ICAI) under the title ‘The Effects of Changes in Foreign Exchange Rates’. In the case of companies, the Companies Accounting Standards Rules, 2006 prescribe various Accounting Standards, in which also similar Accounting Standard 11 (hereinafter referred to as AS 11) has been prescribed, which is largely similar to the one issued by the ICAI. The recent amendment made in such Accounting Standard prescribed under the said Companies Rules (which made major difference with the Accounting Standard of the ICAI) is not relevant for the purpose of this write-up and hence not referred to in this write-up.

    1.2 Primarily, with some exceptions, as per AS 11, at the initial stage, a foreign currency transaction is required to be reported in rupee terms by applying the exchange rate on the date of transaction and at the balance sheet date, Foreign Currency Monetary items are required to be reported at the closing rate. On account of this, exchange difference may result in the same year due to change in the exchange rate between the transaction date and the date of settlement/re-settlement of such monetary items on the balance sheet date. If such transaction is settled in the subsequent year, generally, the exchange difference also results in the current year on account of difference in the exchange rate between the date of transaction and the date of restatement of monetary items at the closing rate on the balance sheet date and such difference (as well as the exchange difference due to settlement of such transaction in same year with which we are not concerned in this write-up), under the accounting treatment are required to be recognised in the year of transaction. We are not concerned with the effect of exchange difference in the subsequent year in this write-up. Likewise, as stated earlier, in this write-up, we are also not concerned with the amendment made in the accounting standard prescribed under the Companies rules.

    1.3 So far as the Income-tax Act (the Act) is concerned, it is a settled position that fluctuations in the rates of foreign exchange resulting into gain or loss are on revenue account, if the foreign currency is held by the assessee on revenue account or a trading account or as a part of circulating capital used in the business (hereinafter such cases are referred to as Revenue Account Cases) and accordingly, in such cases, any appreciation or depreciation in the value of the foreign currency is regarded either as profit or loss on trading/revenue account. On the other hand, if the foreign exchange liability arises in relation to acquisition of fixed asset, the corresponding gain or loss is regarded as of a capital nature (hereinafter referred to as Capital Account Cases).

    1.4 The loss arising on account of difference in the foreign exchange rate prevailing on the date of transaction and the closing rate on the date of balance sheet (when the transaction is settled for the subsequent year) on account of re-statement of outstanding loans on the balance sheet date is merely a notional or contingent loss or should be considered as accrued and allowable, for tax purposes, is an issue that the department had kept alive by taking a stand that such loss should be deductible in the year of actual payment. The issue relates to Revenue Account Cases. So far as Capital Account Cases are concerned, effectively, the same should be governed by the provisions of S. 43A, with some exceptional cases which are ignored for the purpose of this write-up as we intend to deal with the effect of Revenue Account Cases only. This issue with regard to effect of such exchange difference was dealt by the Delhi High Court (294 ITR 451) in the batch of cases with the lead case of Woodward Governor India P. Ltd. (and other appeals) in which the contention of the department was not accepted.

    1.5 Primarily, the effect of exchange difference in Capital Account Cases under the Act is governed by the specific provisions of S. 43A. Effectively, in substance, S. 43A of the Act deals with the adjustment in the actual cost of the relevant asset (for the purpose of depreciation, computation of capital gain etc.), if change in liability has taken place on Capital Account Cases. The Apex Court in the case of Arvind Mills (193 ITR 255) has held that S. 43A lays down, firstly, that the increase or decrease in liability should be taken into account to modify the figure of actual costs, and secondly, that such adjustment should be made in the year in which the increase or decrease in liability arises on account of fluctuation in the rate of exchange. Subsequently, an amendment has been made in S. 43A by the Finance Act, 2002 (w.e.f. the A.Y. 2003-04) to effectively provide that such necessary adjustments under the said provisions should be made in the year of actual payment of liability.

1.6 Recently, the Apex Court had an occasion to consider the issue referred to in Para 1.4 above and the judgment of the Delhi High Court referred to therein and the issue now gets settled. Considering the importance and usefulness of the same, it is thought fit to consider the same in this column. However, in the said Delhi High Court judgment as well as in the judgment of the Apex Court, the issue relating to the effect of exchange difference in Capital Account Cases has also been decided in the context of the provisions of S. 43A, prior to its amendment by the Finance Act, 2002, which is not dealt with in this write-up, as the same would primarily be governed by the amended provisions of S. 43A of the Act.

CIT v. Woodward India P. Ltd., 312 ITR 254 (SC) :

2.1 A batch of various appeals was taken-up by the Apex Court with the above lead case to decide the following question:

“(i) Whether, on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction ul s.37(1) in the year of fluctuation in the rate of exchange or whether the same could only be allowed in the year of repayment of such loans ?:

2.1.1 In addition to the above, a question with regard to the effect of exchange difference in Capital Account Cases was also before the Court. However, as stated in para 1.6 above, we are not concerned with the same in this write-up.

2.2 In the above case, the brief facts of the lead case were: The assessee had claimed deduction of Rs.29,49,088 on account of loss due to foreign exchange fluctuations on the last date of the accounting year by debiting to the Profit & Loss Account. In the earlier years, there were gains on similar account, which were taxed as income by the Department. The assessee was following the Mercantile System of Accounting. There was no dispute that such loss was on revenue account. The Assessing Officer (AO) took a view that the liability as on the last day of the previous year was contingent liability, it was not a certain liability and hence it was disallowed as unrealised loss due to foreign ex change fluctuations. This view was confirmed by the First Appellate Authority. When the matter came-up before the Appellate Tribunal, the issue was decided in favour of the assessee relying on the decision of the Tribunal in the case ‘of the assessee in the earlier years. The decision of the Appellate Tribunal was confirmed by the judgment of the Delhi High Court referred to in para 1.4 above. Accordingly, at the instance of the Department, the issue referred in para 1.4 above came up for consideration before the Apex Court.

2.3 On behalf of the Department,it was, inter alia, contended that: The assessee’s claim is u/s.37, there being no specific provision dealing with the adjustment due to foreign exchange fluctuations on revenue account, as S. 43A deals with such adjustment in Capital Account Cases. For deductibility under’ S. 37, the increase in liability must fulfil the twin requirements of ‘expenditure’ and the factum of such expenditure having been ‘laid out or expended’. The expression ‘expenditure’ is ‘what is paid out’ and ‘some thing, which is gone irretrievably’. The increase in liability at any point of time prior to payment cannot fall within the meaning of the word ‘expenditure’ in S. 37(1). In short, it was effectively contended that the requirement of S. 37(1) are not satisfied in the case of additional liability arising on account of such fluctuation in foreign exchange rate and hence the same is not deductible.

2.4 On behalf of the appellant in the lead case, it was, inter alia, contended that: The assessee has been following the Mercantile System of Accounting, under which whenever an amount is credited to the account of the creditor, the liability has been incurred though it is not actually paid, for which reliance was also placed on the term ‘paid’ as defined in S. 43(2). In the earlier years, the gain arising on similar account has been taxed by the Department. Therefore, when it comes to ‘income’, the Department takes one stand, but when it comes to ‘loss’, the Department takes exactly the contrary stand and hence such double standards cannot be permitted. The effect was also explained by giving hypothetical example.

2.4.1 Another counsel (appearing for M/s. Maruti Udyog Ltd.) adopted similar arguments and, inter alia, further contended that: In the earlier year, in the case of his assessee, similar loss has been allowed as the deduction and gain on similar account has been taxed as income. Accordingly, the Department having accepted the system of accounting of the assessee, it was not open to the Department to introduce new system of accounting. It was further contended that liability to repay the loan in foreign currency accrues, the moment the contract is entered into and it has nothing to do with the time of payment/repayment. According to him, S. 145 of the Act ties down the AO to the accounting system consistently followed by the assessee and if the AO seeks to introduce a new system of accounting, he has to give reasons in his order pointing out defects in the existing accounting system and there is no such finding in the assessment order. The existence of liability stands crystallised on the date of contract and it has nothing to do with the time of payment.

2.5 Having considered the contentions raised on behalf of both the sides, before proceeding to decide the issue, the Court observed as under (pages 260/ 261): “As stated above, on the facts in the cases of M/s. Woodward Governor India P. Ltd., the De-partment has disallowed the deduction/debit to the profit and loss account made by the assessee in the sum of Rs.29,49,088being unrealised loss due to for-eign exchange fluctuation. At the very outset, it may be stated that there is no dispute that in the previ-ous years whenever the dollar rate stood reduced, the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the deduction/ debit. This fact is important. It indicates the double standards adopted by the Department”.

2.6 The Court then noted that the dispute in this batch of the cases, centres around the year in which deduction would be admissible for the increased liability u/s.37(1). The Court then noted the relevant Sections, namely S. 28(i), S. 29, S. 37(1) and S. 145.

2.7 For the purpose of deciding the issue, the Court noted one of the main arguments raised on behalf of the Department to the effect that such a loss is not an ‘expenditure’, which has gone irretrievably as contemplated in S. 37(1) and conse-quently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallise till payment. The Court then stated that the word ‘expenditure’ is not defined in the Act and therefore, is required to be understood in the context in which it is used. S. 37 provides that any expenditure not being an expenditure of the nature described in S. 30. to S. 36 laid out or expended wholly and exclusively for the purpose of business should be allowed in computing the Business Income. In S. 30 to S. 36, the expressions, ‘expenses incurred’ as well as ‘allowances and depreciation’ have also been used. However, in S. 37, the expression used is ‘any expenditure’, which covers both. Therefore, the expression ‘expenditure: as used in S. 37, in the circumstances of particular case, covers an amount which is really a ‘loss’, even though the said amount has not gone out of the pocket of the assessee. For this, the Court also referred to the judgment of the M.P. High Court in the case of M.P. Financial Corporation (165 ITR 765), in which similar view has been taken with regard to the expression ‘expenditure’ and stated that this view has been approved by the Apex Court in the case of Madras Industrial Investment Corpn. Ltd. (225 ITR 802). It seems that the Court, in the context of the issue on hand, was not impressed by the reliance placed on the judgment of the Apex Court in the case of In-dian Molasses Company (37 ITR 66) by the counsel of the Department in support of his above argument for non-applicability of S. 37 in the present case.

2.8 Further explaining the effect of S. 37, the Court stated as under (Page 263) :

“… According to the Law and Practice of Income Tax by Kanga and Palkhivala, S. 37(1) is a residuary Section extending the allowance to items of business expenditure not covered by S. 30 to S. 36. This Section, according to the learned author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts the provisions of S. 145. That Section recognises the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads u/s.30 to u/s.43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word ‘paid’ in S. 43(2), which is used in several S. 30 to S. 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed u/s.28/29. That is why in deciding the question as to whether the word “expenditure” in S. 37(1) includes the word “loss” one has to read S. 37(1) with S. 28, S. 29 and S. 145(1) …. “,

2.9 Dealing with the effect of accounts regularly maintained by the assessee in the course of business and effect of provision of S. 145 on S. 37, the Court further stated as under (Page 263) :

“…. One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. U /s.28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, which-ever is the lower. This is how business profits arising during the year need to be computed. This is one more reason for reading S. 37(1) with S. 145 …. “,

2.10 The Court then reiterated the settled general principle that the profit for income tax purposes should be determined in accordance with the ordinary principles of commercial accounting subject to specific provisions contained in the Act. The Court then also noted that the unrealised profit in the shape of appreciated value of the goods remaining unsold at the year end is not subject to tax as a matter of practice, though loss due to fall in the price below the cost is allowed as deduction even though such a loss has not been realised actually. The Court also explained the philosophy behind this practice and stated that while anticipated loss is taken into account, anticipated profit is not considered as no prudent trader would care to show increased profit before the actual realisation. The Court also noted the provisions of S. 145(2) under which, the Central Government is empowered to notify from time to time the accounting standard to be followed and also noted the provisions of S. 209 of the Companies Act, which makes Mercantile System of Accounting mandatory for the companies. According to the Court, but for the specific provision or applicability of S. 145(3), the method of accounting undertaken by the assessee continuously is supreme unless the AO gives a finding otherwise for the reasons to be stated.

2.11 With the above and earlier referred observations and discussion, on the major issue raised on behalf of the Department, the Court concluded as under (Page 264) :

“For the reasons given hereinabove, we hold that, in the present case, the ‘loss’ suffered by the assessee on account of the exchange difference as on the date of the balance-sheet is an item of expenditure u/s.37(1) of the 1961 Act”.

2.12 Further, after considering the general principles with regard to method of valuation of closing stock (i.e. cost or market value, whichever is less) and the general principles of commercial accounting for determining the profits, the Court stated that S. 145(1) is enacted for the purpose of S. 28 and S. 56. In the present case, S. 28 is relevant and hence, S. 145(1) is attracted. Accepting the relevance of method of accounting for computing business income as provided in S. 145(1), the Court explained the effect of Mercantile System of Accounting, under which the expenditure is debited when a legal liability has been incurred before it is actually disbursed. The Court then expressed the view that the accounting method consistently followed by the assessee needs to be presumed as correct till the AO comes to the conclusion for the reasons to be given that the system does not reflect true and correct profits.

2.13 The Court then stated that having come to the conclusion that valuation is part of accounting system and the business losses are deductible u/s. 37(1) on the basis of ordinary principles of commer-cial accounting and having come to the conclusion that the Central Government has made Accounting Standard 11 (AS 11) mandatory, one needs to examine the said Accounting Standard. The Court then noted various requirements of AS11 including the requirement of recording the transaction at the exchange rate of that date and re-statement of outstanding liability on the closing rate of exchange (referred to in Para 1.2 above). The Court also noted the requirements that any difference, loss or gain, arising on conversion of the said liability at the closing rate should be recognised in the profit and loss account of the reporting period. The Court, then, explained the fact of this requirement by the following hypothetical example (Page 266) :

“A company imports raw material worth US $ 250000 in January 15, 2002, when the exchange rate was Rs.46 per US $. The company records the transaction at that rate. The payment for the imports is made on April 15, 2002, when the exchange rate is Rs.49 per US $. However, on the balance-sheet date, March 31, 2002, the rate of exchange is Rs.50 per US $. In such a case, in terms of AS-II, the effect of the exchange difference has to be taken into the profit and loss account. Sundry creditors is a monetary item and hence such item has to be valued at the closing rate, i.e. Rs.50 at March 31, 2002, irrespective of the payment for the sale subsequently at a lower rate. The difference of Rs.4 (50-46) per US $ is to be shown as an exchange loss in the profit and loss account and is not to be adjusted against the cost of raw materials”.

2.14 Finally, the Court reiterated the settled principles to determine the nature of the exchange difference (referred to in Para 1.3 above) and concluded on the issue as under (Page 267) :

“In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is the mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it be-comes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bonafide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation”.

Conclusion:

3.1 In view of the above judgment of the Apex Court, it is now clear that such loss on account of exchange difference arising due to restatement of liability at the year end exchange rate is not to be regarded as notional/contingent loss, when the assessee follows Mercantile System of Accounting.

3.2 In view of the above judgment of the Apex Court, it is now clear that for income tax purpose, in the case of assessee following the Mercantile System of Accounting, such loss arising on account of fluctuation in the foreign exchange rate at the year end is deductible while computing the business income in all bonafide cases.

3.3 While taking the above view, it seems that the Court was also largely guided by the fact that in the earlier years profit on similar account has been offered for tax by the assessee and the same has also been taxed as income by the Department. As such, it seems that the Court has, though impliedly, accepted the contention raised on behalf of the assessee that such double standards cannot be permitted.

3.4 In particular circumstances, in the context of S. 37, the expression, ‘expenditure’ includes ‘loss’. It seems that this conclusion should be read in the context of the question raised and the arguments advanced on behalf of the Department. Otherwise, in general, the difference between the ‘loss’ and the ‘expenditure’ still survives.

3.5 It seems that the requirement of adopting method for making entries in the books in respect of losses and gains as per nationally accepted accounting standard mentioned by the Court also should be read and considered in the context of the issue involved in the cases before the Court.

3.6 The Court has also reiterated the settled position that the method of accounting consistently followed by the assessee should be presumed to be correct unless the AO comes to the conclusion for the reasons  to be given that  the system  does not reflect the true and correct profits. Accordingly, such method can be disregarded only by justifiable reasons to be recorded in the order.

3.7 Though in the above write-up we have not considered the effect of exchange difference in Capital Account Cases, we may mention that the above judgment is also an authority to hold that amendment made by the Finance Act, 2002 (w.e.f. A.Y. 2003-4) is prospective.

Search and seizure — Surcharge is leviable on income assessed under Chapter XIV-B and the proviso to S. 113 inserted by Finance Act, 2002 was only clarificatory in nature.

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13 Search and seizure — Surcharge is leviable on income
assessed under Chapter XIV-B and the proviso to S. 113 inserted by Finance Act,
2002 was only clarificatory in nature.


[CIT v. Suresh N. Gupta, (2008) 297 ITR 322 (SC)]

On January 17, 2001, a search u/s.132 of the 1961 Act was
carried out at the premises of the representative-assessee, an individual. The
search unearthed an unexplained investment of Rs.65,000 being the value of
household valuables and Rs.97,427 on account of unexplained marriage expenses
(undisclosed income). Accordingly, in the block assessment, the Assessing
Officer determined the assessee’s undisclosed income at Rs.1,62,427. He computed
tax thereon at 60% in terms of S. 113 of the 1961 Act amounting to Rs.97,456, on
which surcharge was levied at 17%, i.e., Rs.16,504.

The levy of surcharge was challenged by the assessee in
appeal before the Commissioner of Income-tax (Appeals). The said appeal was
allowed. The decision of the Commissioner of Income-tax (Appeals) was confirmed
by the Tribunal and the High Court.

On civil appeal, the Supreme Court held that the concept of a
charge on the ‘total income’ of the previous year under the 1961 Act is retained
even under Chapter XIV-B. Therefore, S. 158BB which deals with computation of
undisclosed income of the block period has to be read with computation of total
income under Chapter IV of the 1961 Act and once S. 158BB is required to be read
with S. 4 of the 1961 Act, then the relevant Finance Act of the concerned year
would automatically stand attracted to the computation under Chapter XIV-B. S.
158BB looks at S. 113.

The Section fixes the rate of tax of 60%. Bare perusal of
various Finance Acts starting from 1999 indicates that Parliament was aware of
the rate of tax prescribed by S. 113 and yet in the various Finance Acts,
Parliament has sought to levy surcharge on the tax in the case of block
assessment. In the present case the Assessing Officer had applied the rate of
surcharge at 17% which rate finds place in paragraph A of Part I of the First
Schedule to the said Finance Act of 2001. Therefore, surcharge leviable under
the Finance Act was a distinct charge, not dependent for its leviability on the
assessee’s liability to pay income-tax but on assessed tax.

The Supreme Court held that even without proviso to S. 113
(inserted vide the Finance Act, 2002, with effect from June 1, 2002), of
paragraph A of Part I of the First Schedule to the Finance Act 2001, was
applicable to block assessment under Chapter XIV-B. The Supreme Court further
held that the said proviso to S. 113 inserted vide the Finance Act, 2002 was
clarificatory in nature.


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MAT : S. 80HHC and S. 115JA of Income-tax Act, 1961 : A.Y. 1998-99 : Computation of deduction u/s.80HHC to be worked out on the basis of adjusted book profits u/s.115JA.

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II. Reported :

  1. MAT : S. 80HHC and S. 115JA of Income-tax Act, 1961 : A.Y.
    1998-99 : Computation of deduction u/s.80HHC to be worked out on the basis of
    adjusted book profits u/s.115JA.



[CIT v. K. G. Denim Ltd., 180 Taxman 590 (Mad.)]

For the A.Y. 1998-99 the assessee-company was assessed
u/s.115JA of the Income-tax Act, 1961. The assessee had computed deduction
u/s.80HHC with reference to book profit ascertained u/s.115JA and the same was
allowed by the Assessing Officer. Subsequently, invoking the powers u/s.263 of
the Act, the Commissioner revised the assessment order and held that the
deduction u/s.80HHC has to be computed with reference to the normal profits
and not with reference to book profits u/s.115JA. The Tribunal set aside the
order of the Commissioner.

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

    “(i) In CIT v. Rajnikant Schnelder & Associates (P)
    Ltd.,     302 ITR 22 (Mad.), the High Court held that the Assessing Officer
    is not entitled to touch the profit and loss account prepared by the
    assessee as per the provisions contained in the Companies Act, while
    arriving at the book profit u/s.115JA and the book profit so arrived at
    should be the basis for taxation and, therefore, the computation of
    deduction u/s.80HHC should be limited to the case of profits of eligible
    category only.

    (ii) In view of the aforesaid decision, the Tribunal was
    right in law, in holding that the deduction u/s.80HHC in a case of MAT
    assessment is to be worked out on the basis of the adjusted book profit
    u/s.115JA.”

 

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Litigation — Public Sector undertakings — Clearance of Committee on Disputes — Time for reference within a period of one month is not rigid — Delay in approaching the Committee does not make it illegal but the delay should not be due to lethargy.

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1 Litigation — Public Sector undertakings —
Clearance of Committee on Disputes — Time for reference within a period of one
month is not rigid — Delay in approaching the Committee does not make it
illegal but the delay should not be due to lethargy.

[CIT v. Oriental Insurance Co. Ltd.,
(2008) 304 ITR 55 (SC)]

The assessee, an insurance company was covered by
the Insurance Act, 1938. According to the appellant, every insurance company
has to be assessed u/s.44 of the Income-tax Act, 1961 as per Rule 5 of the
First Schedule. An assessment was made and the same was upheld by the
Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal
deleted the addition made. The Tribunal accepted the stand of the
respondent-insurance company. The question arose as to whether the Department
would prefer appeals and/or file petitions without obtaining necessary
clearance from the Committee of Disputes (in short ‘the COD’) constituted in
terms of order of the Supreme Court. According to the High Court, it was
necessary to refer the matter to the said Committee. The High Court held that
the same was to be done within a period of one month in terms of the order of
the Supreme Court in Oil and Natural Gas Commission v. Collector of Central
Excise, (2004) 6 SCC 437. The High Court dismissed the appeal. The High
Court held that since this Court had set the time frame, there was no scope
for any deviation therefrom.

On an appeal to the Supreme Court, it was
clarified that there was actually no rigid time frame indicated by it. The
emphasis on one month’s time was to show the urgency needed. Merely because
there is some delay in approaching the Committee that does not make the action
illegal. The Committee is required to deal with the matter expeditiously, so
that there is no unnecessary backlog of appeals which ultimately may not be
pursued. In that sense, it is imperative that the concerned authorities take
urgent action, otherwise the intended objective would be frustrated. There is
no scope for lethargy. It is to be tested by the Court as to whether there was
any indifference and lethargy and in appropriate cases refuse to interfere. In
the instant case the Supreme Court found that factual position was not that.
The Supreme Court therefore, set aside the order of the High Court and
directed consideration of the question of desirability to proceed in the
matter before it on receipt of the report from the concerned Committee.

 

Learned counsel for the Department submitted to
the Supreme Court that even if the Committee has declined to grant permission,
it was still open to raise the issues in appropriate proceedings. The Supreme
Court expressed no opinion in that regard, but observed that where the
Committee has declined to deal with the matter on the ground of belated
approach, the same cannot be sustained. The Committee has to consider the
matter on merits.

The Supreme Court further observed that where
permission has been granted by the Committee, there is no impediment on the
Court to examine the matter and take a decision on merits. But where there is
no belated approach, the matter has to be decided. The Court has to decide
whether because of unexplained delay and lethargic action it would decline to
entertain the matters. That would depend on the factual scenario in each case,
and no straitjacket formula can be adopted.

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Business expenditure/loss : Assessee federal society of primary milk societies : Milk rate difference determined in March and paid in subsequent year : Is allowable business expenditure/loss.

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II. Reported :

  1. Business expenditure/loss : Assessee federal society of
    primary milk societies : Milk rate difference determined in March and paid in
    subsequent year : Is allowable business expenditure/loss.

[CIT v. Solapur Distt. Co-op. Milk Producers & Process
Union Ltd., 180 Taxman 533 (Bom.)]

The assessees were federal societies of primary milk
societies and their business was to purchase milk from their members and other
producers at the rate to be fixed by their board of directors on the basis of
fat content of milk and to sell the milk to various parties. The assessee
fixed the rate of purchasing of milk at the beginning of the year on the basis
of the price declared by the State Government and price which other buyers
paid to the vendors. Those rates were revised from time to time and were
provisional to the final milk rate difference which was to be determined in
the month of March every year and was to be paid to primary milk societies in
the following year. The Assessing Officer refused to allow deduction of the
final rate difference on the ground that it was made on the basis of the
accrued profit of the year and, hence, would amount to distribution of profit.
The Tribunal allowed the claim and observed that the resolutions to pay final
rate difference were always passed in the month of March every year, i.e.,
before profit could be said to accrue; and that rate difference was paid only
on the basis of quantity of milk supplied during year and not in proportion of
shareholding, so as to amount to distribution of profit.

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

    “(i) It was not the case of distribution of profit as the
    amount to be paid was not out of the profit ascertained at the annual
    general meeting. It was not paid to all shareholders. The amount was paid to
    the members who supplied milk and in some cases also to non-members. The
    payment was for the quantity of milk supplied and in terms of the quality
    supplied.

    (ii) The commercial expediency for payment of that price
    were the market condition, and the need to procure more milk from the
    members and non-members to the assessee. Therefore, the amount paid, by no
    stretch of imagination, could be said to be dividend to the members or
    shareholders or payment in the form of bonus, as bonus also had to be paid
    from the accrued profits.

    (iii) The Tribunal was justified in deleting the addition
    made by the Assessing Officer.”

     

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Gratuity : Deduction u/s.10(10)(iii) of Income-tax Act, 1961 : No distinction between gratuity paid under Payment of Gratuity Act or otherwise : Where gratuity amount paid to employee was within the limit prescribed by Notification, deduction of income-ta

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II. Reported :

  1. Gratuity : Deduction u/s.10(10)(iii) of Income-tax Act,
    1961 : No distinction between gratuity paid under Payment of Gratuity Act or
    otherwise : Where gratuity amount paid to employee was within the limit
    prescribed by Notification, deduction of income-tax at source from gratuity
    amount was unjustified.


[North West Karnataka Road Transport Corporation v. Dy.
Labour Commissioner, 180 Taxman 489 (Kar.)]

The deceased employee of the petitioner-corporation had
filed a claim petition under the Payment of Gratuity Act, 1972 before the
controlling authority claiming the difference of gratuity amount on the ground
that he was not paid the full gratuity. The gratuity amount paid to the said
employee was less than the limit prescribed by the Notification. However,
while making payment of the difference, the petitioner-corporation deducted
income-tax at source. The petitioner-corporation contended before the
Karnataka High Court that income-tax was deducted from the amount of gratuity
since in terms of S. 10(10)(iii), the exemption was given only in respect of
gratuity amount under the provisions of the Payment of Gratuity Act, and not
in respect of payment of amount under the regulation.

The Karnataka High Court held as under :

    “(i) S. 192 requires the employer to deduct income-tax
    from the salary. S. 10(10) deals with the exclusion of the gratuity amount
    from the total income. By a reading of the provisions of S. 10(10)(iii), it
    is clear that in all the cases of payment of gratuity, an exclusion of
    gratuity amount is given from the total income, i.e., excluding the
    gratuity from the payment of tax to the extent of limit prescribed by
    Notification issued in this behalf by the Central Government. It also makes
    it clear that the Notification will be at par with the employees of the
    Government. The Income-tax Act excludes the gratuity amount from the total
    income up to the limit fixed. The contention of the Corporation that it was
    only in respect of payment of gratuity under the Act and not under the
    regulations, was not tenable and was not in consonance with the provisions
    of the Act.

    (ii) The Act excludes the gratuity amount to the extent
    of limit prescribed under the Income-tax Act. In the instant case, the
    gratuity amount payable to the employee was less than the pre-scribed
    amount. Hence the deduction of income-tax by the corporation was per se
    contrary to the provisions of S. 10(10)(iii). There is no distinction
    between gratuity paid under Payment of Gratuity Act or otherwise.
    Accordingly, the contention that gratuity amount was also liable for
    income-tax was to be rejected.

    (iii) The deduction of the income-tax from the gratuity
    amount was not justified.”

 

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Waiver of interest and penalty : S. 139(8), S. 217, S. 271(1)(a), S. 273 and S. 273A of Income-tax Act, 1961 : A.Ys. 1987-88 and 1988-89 : Commissioner waived penalty but refused to waive interest : Not justified.

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I. Unreported :


  1. Waiver of interest and penalty : S. 139(8), S. 217, S.
    271(1)(a), S. 273 and S. 273A of Income-tax Act, 1961 : A.Ys. 1987-88 and
    1988-89 : Commissioner waived penalty but refused to waive interest : Not
    justified.

[Sun Deep Jewellers v. CIT (Bom.), W.P. No. 888 of
1994, dated 20-4-2009 (Not reported)]

For the A.Ys. 1987-88 and 1988-89 the petitioner-firm and
its partners filed their returns belatedly on 7-2-1990. The Assessing Officer
completed the assessment u/s.143(1) of the Income-tax Act, 1961 accepting the
returned income. The Assessing Officer charged interest u/s.139(8) and u/s.217
of the Act and also imposed penalty u/s.271(1)(a) and u/s.273 of the Act. On
an application for waiver of interest and penalty the Commissioner waived
penalty but refused to waive interest.

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

“(i) Admittedly, the petitioners had submitted the
income-tax returns voluntarily without any notice or any action being taken
by the Income-tax Department and had also deposited the income-tax as per
their own assessment. The AO found the assessment correct and the returns
were accepted without any objection. It shows that the petitioners had, in
fact, co-operated in the assessment and the enquiry which could be held
before or after filing of such income-tax returns. This indicates that they
acted in good faith and they had made full and true disclosure of their
income voluntarily.

(ii) They had also given reasons and the circumstances in
which the income-tax returns could not be submitted within time. Those
reasons were accepted for the purpose of waiver of penalty. If the
conditions were satisfied and if the reasons given by the petitioners were
good for waiver of penalty, it is difficult to understand why they could not
be good for waiver of interest, particularly when it appears that the delay
was not intentional and because of the circumstances, in which they found
themselves, the returns could not be submitted within time.”

The High Court quashed and set aside the order of the
Commissioner refusing to waive interest and directed the refund of the
interest paid by the petitioner.

Co-operative Housing Society : Transfer fees : Principle of mutuality applies to transfer fees received in accordance with the bye-laws and as per restriction by Government regulations : Excess amount not permissible under bye-laws, etc. to be returned :

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I. Unreported :

  1. Co-operative Housing Society : Transfer fees : Principle of
    mutuality applies to transfer fees received in accordance with the bye-laws
    and as per restriction by Government regulations : Excess amount not
    permissible under bye-laws, etc. to be returned : If not returned will be
    taxable.


[Sind Co-op. Hsg. Society v. ITO (Bom.), ITA No. 931
of 2004 dated 17-7-2009 (Not reported)]

In a group of appeals concerning the taxability of transfer
fees received by a co-operative society the Bombay High Court has considered
and decided the following question of law.

“Whether on the facts and in the circumstances of the
case any part of transfer fees received by the assessee societies — whether
from outgoing or incoming members — is not liable to tax on the ground of
mutuality ?”

The Bombay High Court has held as under :

“(i) The principle of mutuality will apply to a
co-operative housing society which has its predominant activity, the
maintenance of the property of the society which includes its building or
buildings and as long as there is no taint of commerciality, trade or
business.

(ii) As the main activity of a co-operative housing
society is to maintain the property owned by it and to render services to
its members by way of usual privileges, advantages and conveniences, there
is no profit motive involved in these activities. The amount legally
chargeable and received goes into the fund of the society which is utilised
for the repairs of the property and common benefits to its members.

(iii) Charging of transfer fees as per bye-laws has no
element of trading or commerciality. There therefore being no taint of
commerciality, the question of earning profits would not arise when the
housing society from the funds received applies the money received towards
maintenance of the society and providing the members with usual privileges,
advantages and conveniences.

(iv) The transfer fee can be appropriated only if the
transferee is admitted to membership. The fact that a proposed transferee
may make payment in advance by itself is not relevant. The amount
can only be appropriated on the transferee being admitted as a member. If it
is held that the payment of transfer fee is by a stranger, it will certainly
be in the nature of gift and not income.

(v) Whether it is voluntary or not would make no
difference to the principle of mutuality. Payments are made under the
bye-laws which con-stitute a contract between the society and its members
which is voluntarily entered into and voluntarily conducted as a matter of
convenience and discipline for running the society.

(vi) If it is the case that amount more than permissible
under the Notification has been received under pressure or coercion or
contrary to Govt. directions, then considering S. 72 of the Contract Act,
that amount will have to be refunded. At any rate if the society retains the
amount in excess of binding Govt. Notification or the bye-laws, that amount
will be exigible to tax as it has an element of profiteering.

(vii) An argument has been advanced that the societies
are charging more than the amount as notified or permitted by the Government
Notification dated 9-8-2001. The cases before us are for the assessment
years previous to that. Earlier Notification dated 20-12-1989 provided that
only if the bye-laws were amended in terms of Notification dated 27-11-1989,
then the society could not charge more than what was set out in the
Notification. We really would not be concerned therefore, in this group of
cases with Notification as now notified by the Government. If therefore, any
amount has been received beyond the amount notified by the Government and
that amount has not been refunded to the members, to that excess amount as
already held, the principle of mutuality will apply.”

Co-operative Bank : Income from banking business : Deduction u/s.80P(2)(a)(i) of Income-tax Act, 1961 : Interest received from investments made in Kisan Vikas Patra and Indira Vikas Patra out of voluntary reserve : Is income from banking business exempt u

New Page 2

 

I. Unreported :

  1. Co-operative Bank : Income from banking business :
    Deduction u/s.80P(2)(a)(i) of Income-tax Act, 1961 : Interest received from
    investments made in Kisan Vikas Patra and Indira Vikas Patra out of voluntary
    reserve : Is income from banking business exempt u/s. 80P(2)(a)(i).

[CIT v. The Solapur Nagari Audyogic Sahakari Bank Ltd. (Bom.),
ITA No. 46 of 2008 dated 16-6-2009 (Not reported)]

The following question was raised before the Bombay High
Court in the appeal filed by the Revenue :

“Whether the interest income received by a co-operative
bank from investments made in Kisan Vikas Patra (‘KVP’ for short) and Indira
Vikas Patra (‘IVP’ for short) out of voluntary reserves is income from
banking business exempt u/s. 80P(2)(a)(i) of the Income-tax Act, 1961 ?”

The Bombay High Court answered the question in the
affirmative and in favour of the assessee and held as under :

“(i) This Court in the case of CIT v. Ratnagiri
District Central Co-operative Bank Ltd., 254 ITR 697, after considering
various provisions of the Maharashtra Co-operative Societies Act, 1960 and
the Banking Regulation Act, 1949 has held that the investments made by a
co-operative bank in IVP out of the funds generated from the banking
business would have direct and proximate connection with or nexus with the
earning from banking business and attract the provisions of S. 80P(2)(a)(i)
of the Act. In other words, this Court in the above case has held that the
interest income earned by a co-operative bank from IVP would be income from
banking business, if the investment in IVP represented the funds generated
from the banking business. The said decision has been upheld by the Apex
Court by dismissing the Special Leave Petition filed by the Revenue.

(ii) Thus, it is clear that investment in KVP/IVP by a
co-operative bank is a permissible banking business and for availing
deduction u/s. 80P(2)(a)(i) of the Act, the co-operative bank has only to
show that the investment in KVP/IVP have been made from the funds generated
from the banking business. Whether the investments in KVP/IVP have been made
out of statutory reserves or non-statutory reserves is wholly irrelevant, so
long as the funds in the statutory reserves or the non-statutory reserves
are the funds generated from the banking business.

(iii) It is not the case of the Revenue that the amounts
in the non-statutory reserves were not the amounts generated from the
banking business. In these circumstances, the decision of the Tribunal in
holding that the interest income from KVP/IVP was from the business of
banking eligible for deduction u/s.80P(2)(a)(i) of the Act cannot be
faulted.”

Cash credit : S. 68 of Income-tax Act, 1961 : A.Y. 1998-99 : Sale of jewellery declared under VDIS 1997 and capital gain offered to tax : Addition of whole of consideration for sale u/s.68 as unexplained cash credit : Not justified.

New Page 2

 

I. Unreported :

  1. Cash credit : S. 68 of Income-tax Act, 1961 : A.Y.
    1998-99 : Sale of jewellery declared under VDIS 1997 and capital gain offered
    to tax : Addition of whole of consideration for sale u/s.68 as unexplained
    cash credit : Not justified.

[CIT v. Uttamchand Jain (Bom.), ITA No. 634 of 2009,
dated 2-7-2009 (Not reported)]

The respondent assessee had declared diamond jewellery
weighing 65.75 carats under the Voluntary Disclosure of Income Scheme, 1997 (VDIS,
1997). The said declaration was accepted by the Department and a certificate
was issued to the assessee under VDIS, 1997. In the return of income filed by
the assessee-respondent for the A.Y. 1998-99 the assessee had claimed to have
sold the said jewellery declared under VDIS, 1997 to M/s. Dhananjay Diamonds
on 20-1-1999 for Rs.10,35,562 and the resultant long-term capital gain of
Rs.1,75,520 was offered to tax. The return was accepted u/s.143(1)(a) of the
Income-tax Act, 1961 on 23-7-1999.

On 31-3-2000, in the course of a survey, the statement of
Mr. Vishnudatt Trivedi, proprietor of M/s. Dhananjay Diamonds was recorded,
wherein Mr. Trivedi stated that he was not doing actual business of trading
and manufacture of diamonds and that the transactions reflected in his books
of account were merely accommodation entries given to various VDIS declarants.
As per the statement Mr. Sanjay Saxena, a resident of Kalyan used to visit Mr.
Trivedi with cash and only a description of the diamonds and not the actual
diamonds. The cash given by Sanjay Saxena was deposited in one of the bank
accounts of Mr. Trivedi and thereafter purchase bills as well as cheques were
issued in the names of the parties furnished by Mr. Sanjay Saxena towards the
sale price of the diamond jewellery declared under VDIS, 1997 allegedly sold
by those parties. Based on the said statement of Mr. Trivedi the assessment of
the assessee for A.Y. 1998-99 was reopened on 16-5-2001 and in the course of
the reassessment proceedings Mr. Trivedi appeared before the Assessing Officer
and made a statement on oath confirming the purchase of diamonds from the
assessee and that the assessee was not introduced to him by Mr. Sanjay Saxena.
However, the Assessing Officer made the entire amount of Rs.10,35,562 as
undisclosed income of the assessee, which was originally claimed and accepted
as sale proceeds of the diamond jewellery declared under VDIS, 1997. The CIT(A)
upheld the addition and held that the statement of Mr. Trivedi was backed by
the evidence of non-existence of diamond jewellery at the time of survey,
allegedly purchased by Mr. Trivedi and the cash deposits made in the bank
accounts of Mr. Trivedi before issuing cheques to various parties.

In appeal, two Members of the Tribunal differed in their
view and the matter was referred to the third Member. In the light of decision
of the third member, the appeal filed by the assessee was allowed and the
addition was deleted.

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

“(i) At the outset, we may note that the certificate
issued by the Revenue under VDIS, 1997 to the effect that the assessee had
diamond jewellery weighing 65.75 carats continues to be valid and
subsisting. In fact, no proceedings have been initiated so far to cancel the
certificate issued to the assessee under VDIS, 1997.

(ii) As the VDIS, 1997 certificate issued by the
Department is valid and subsisting, it is not open to the Revenue to contend
that there was no jewellery which could be sold by the assessee on
20-1-1999. It is not the case of the Revenue that the assessee continues to
be in possession of the said diamond jewellery even after the sale effected
on 20-1-1999 or that the said jewellery has been sold to third parties. In
these circumstances, the decision of the Tribunal in accepting the claim of
the assessee that the amount of Rs.10,35,562 represented the sale proceeds
of the diamond jewellery declared under VDIS, 1997 cannot be faulted.

(iii) The fact that the diamond jewellery claimed to have
been sold by the assessee was not found with the purchaser (Dhananjay
Diamonds) or his associates cannot be held against the assessee, because,
admittedly, the said diamond jewellery declared under VDIS, 1997 is also not
found with the assessee after the sale is effected. If existence of the
diamond jewellery with the assessee prior to the sale is evidenced by the
VDIS, 1997 certificate and on sale of the said jewellery the assessee has
received the consideration which is duly accounted for, then the mere fact
that the jewellery sold by the assessee is not found with the purchaser
cannot be a ground to hold that the transaction was bogus and the
consideration received by the assessee was the undisclosed income of the
assessee.

(iv) The decision of the Assessing Officer in discarding
the sale and holding that the amount received by the assessee from Mr.
Trivedi represented the undisclosed income of the assessee is based on
conjectures and surmises and is not based on any independent evidence
gathered prior to or during the course of reassessment proceedings. In these
circumstances, in the absence of any cogent evidence brought on record, the
decision of the Tribunal in holding that the Assessing Officer has failed to
established the nexus between the cash amount deposited in the bank account
of Mr. Trivedi is attributable to the cheque issued by Mr. Trivedi in favour
of the assessee cannot be faulted.

(v) Consequently, the decision of the Tribunal in
deleting the addition of Rs.10,35,562 cannot be faulted.”

TDS : S. 194LA of Income-tax Act, 1961 : Compensation for acquisition of agricultural land : Collector had no jurisdiction to deduct tax at source : Deduction illegal.

New Page 1

7. TDS : S.
194LA of Income-tax Act, 1961 : Compensation for acquisition of agricultural
land : Collector had no jurisdiction to deduct tax at source : Deduction
illegal.



[Risal Singh v. UOI, 321 ITR 251
(P&H)]

The petitioners received
compensation for acquisition of their agricultural land. While disbursing the
compensation, the Collector made deduction of tax at source and remitted the
amount to the Revenue. The Collector rejected the petitioners’ objection stating
that the deduction has been made on the instructions of the Haryana Urben
Development Authority.

On a writ petition filed by the
petitioners, the Revenue contended that alternative remedy is available to the
petitioners to seek refund after getting assessment done. The Punjab and Haryana
High Court allowed the petition and held as under :


“(i) In the absence of
jurisdiction to deduct tax from compensation for agricultural land, the
stand of the Income-tax Department that since there was a remedy of getting
the assessment done and to receive refund could not be accepted.

(ii) The Collector could not
have made deduction without determining the jurisdictional fact that
compensation was for property other than agricultural land. Thus deduction
of tax at source without determining the plea of the petitioner that the
land was agricultural land was not justified. The amount was said to have
been remitted to the Income-tax Department which was illegal.


(iii) We allow this petition and
direct the Income-tax Department to refund the amount to the Collector within
one month from the date of receipt of a copy of this order. Thereafter, the
Collector will determine whether compensation paid is for property other than
agricultural land or otherwise and whether deduction of tax at source was
permissible under any provisions of law. Whether deduction is permissible or not
will be decided by the Collector within two months from the date of receipt of a
copy of this order. If deduction is found not permissible, the amount will be
refunded to the petitioners not later than three months from receipt of a copy
of this order.”

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Deemed profit : S. 41(1) of Income-tax Act, 1961 : A.Y. 1996-97 : Outstanding liability : Continued as liability in the books : Liability not written back : Liability cannot be said to have ceased to exist : It cannot be treated as income u/s.41(1).

New Page 1

5. Deemed profit
: S. 41(1) of Income-tax Act, 1961 : A.Y. 1996-97 : Outstanding liability :
Continued as liability in the books : Liability not written back : Liability
cannot be said to have ceased to exist : It cannot be treated as income
u/s.41(1).


[CIT v. GP International Ltd.,
229 CTR 86 (P&H)]

For the A.Y. 1996-97, the
Assessing Officer made an addition of Rs.3,30,000 in respect of the outstanding
amount payable to one M/s. ACP relying on the provisions of S. 41(1) of the
Income-tax Act, 1961. The Tribunal found that the assessee has continued to show
the liability as the outstanding liability and has not written back the same.
The tribunal therefore deleted the addition.

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

“The assessee having shown the
amount payable by it to another company as an existing liability in its books
and not written back the same, it cannot be said that the aforesaid liability
has ceased to exist and, therefore it cannot be treated as income by invoking
the provisions of S. 41(1).”

 

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Manufacture : Exemption u/s.10A, u/s. 10AA of Income-tax Act, 1961 : A.Y. 2004-05 : Definition in Exim Policy applicable : Has wide and liberal meaning : Blending and packing of tea qualifies for exemption.

New Page 1

6. Manufacture :
Exemption u/s.10A, u/s. 10AA of Income-tax Act, 1961 : A.Y. 2004-05 : Definition
in Exim Policy applicable : Has wide and liberal meaning : Blending and packing
of tea qualifies for exemption.


[Girnar Industries v. CIT, 187
Taxman 136 (Ker.)]

The assessee was an industrial
unit located in the special economic zone, engaged in blending and repacking of
tea for export. For the relevant assessment year i.e., A.Y. 2004-05, it claimed
deduction of export profit in respect of the blended tea exported from the
industrial unit u/s.10A. The assessing authority denied the deduction on the
ground that ‘blending’ did not answer the description of manufacture or
processing before the definition clause of ‘manufacture’ contained in S. 2(r) of
the Special Economic Zones Act, 2005 was incorporated in the provisions of S.
10AA with effect from 10-2-2006. The Tribunal upheld the decision of the
Assessing Officer.

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


“(i) Prior to the passing of
the Special Economic Zones Act, 2005, the assessee’s industry was located in
the zone previously known as ‘Cochin Export Processing Zone’ which is a Free
Trade Zone covered by S. 10A. It is clear from the provisions of S. 10A that
deduction is of the profits and gains derived by the industrial undertaking
from the export of articles, etc., manufactured or produced by it.

(ii) In substance, the
provisions of S. 10A and provisions S. 10AA, which were introduced later on,
serve the very same purpose of granting exemption on the profit earned by
the industrial units in the FTZ/SEZ. These provisions introduced in the
Income-tax Act are essentially for implementation of the EXIM Policy
periodically announced by the Government providing incentives to the
export-oriented units located in the FTZ/SEZ mainly to augment the foreign
exchange earnings. In fact, though S. 10A does not contain a definition for
‘manufacture’, definition of the said term contained in S. 2(r) of the SEZ
Act has been incorporated in S. 10AA with effect from 10-2-2006. Admittedly,
the said definition covers blending also. Therefore, blending and packing of
tea done by the assessee qualified for exemption u/s.10AA from 10-2-2006
onwards.

(iii) The question to be
considered was whether the benefit was available to the assessee for the A.Y.
2004-05 for the reason that the then existing provision of S. 10A did not
contain a definition clause. Admittedly, S. 10A also provides for exemption
in respect of goods manufactured or produced and sold by units in the FTZ.
Undoubtedly, the exemption to industries in the FTZ is granted based on the
EXIM Policy framed by the Government periodically. The definition of
‘manufacture’ as per the EXIM Policy is given a very wide definition to take
in even processing involving conversion of something to another thing with a
distinct name, character and use. Even refrigeration of an item, which
involves only freezing, repacking, labelling, etc., is also covered by the
definition of ‘manufacture’. Blending of tea is mixing of different
varieties of tea produced in estates located in different regions having
different altitudes, climatic conditions, etc. It is common knowledge that
new flavours of tea are generated by blending its different varieties.

(iv) Since the purpose of
exemption u/s.10A is to give effect to the EXIM Policy of the Government,
the definition of ‘manufacture’ contained in the EXIM Policy is applicable.
For the purpose of the said provision, ‘manufacture’ as defined under the
EXIM Policy has a wide and liberal meaning covering tea blending as well
and, therefore, blending and packing of tea qualifies for exemption u/s.10A.

(v) Besides that, the
assessee-industry, presently in the SEZ engaged in the same process of
blending and packing of tea, was specifically brought under the exemption
clause through incorporation of S. 2(r) of the SEZ Act in the provisions of
S. 10AA. Therefore, the later amendment is only clarificatory and the
definition of ‘manufacture’ contained in S. 2(r) of the SEZ Act incorporated
in S. 10AA with effect from 10-2-2006, which is essentially the same as the
definition contained in the EXIM Policy, applies to S. 10A also. Therefore,
blending of tea was a manufacturing activity which entitled the assessee to
exemption u/s.10A for the A.Y. 2004-05.”


 

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Deemed profit : S. 41(1) of Income-tax Act, 1961 : Remission or cessation of trading liability : A.Y. 2004-05 : Trading liability shown as outstanding in books and not written back : No remission or cessation of liability merely on account of passage of t

New Page 1

4. Deemed profit
: S. 41(1) of Income-tax Act, 1961 : Remission or cessation of trading liability
: A.Y. 2004-05 : Trading liability shown as outstanding in books and not written
back : No remission or cessation of liability merely on account of passage of
time : S. 41(1) not attracted : Addition not just.


[CIT v. Smt. Sita Devi Juneja,
187 Taxman 96 (P & H)]

For the A.Y. 2004-05, the
Assessing Officer made an addition of Rs.1.47 crores on account of outstanding
sundry credit balances as on 31-3-2004, relying on the provisions of S. 41(1) of
the Income-tax Act, 1961. CIT(A) held that there was no cessation or remission
of liability and deleted the addition. The Revenue’s appeal was dismissed by the
Tribunal.

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


“(i) It was the conceded
position that in the
assessee’s balance sheet, the liability of Rs.1.47 crores had been shown,
which was payable to the sundry creditors. Such liability shown in the
balance sheet indicated the acknowledgement of the debt payable by the
assessee. Merely because such liability was outstanding for the last six
years, it could not be presumed that the said liability had ceased to exist.

(ii) It was also conceded
position that there was no bilateral act of the assessee and the creditors,
which indicated that the said liability had ceased to exist. In absence of
any bilateral act, the said liability could not have been treated to have
ceased. In view of these facts, the Commissioner (Appeals) as well as the
Tribunal had rightly come to the conclusion that the Assessing Officer had
wrongly invoked the Explanation I to S. 41(1) and made the aforesaid
addition on the basis of presumptions, conjectures and surmises.

(iii) It had been further
found that the Assessing Officer had failed to show that in any earlier year
allowance of deduction had been in respect of any trading liability incurred
by the assessee.

(iv) It was also not proved
that any benefit was obtained by the assessee concerning such a trading
liability by way of remission or cessation thereof during the concerned
year. Thus, there did not accrue any benefit to the
assessee, which could be deemed to be the profit or gain of the assessee’s
business, which would otherwise not be the assessee’s income. It had been
further found as a fact that the assessee had filed the copies of accounts
of sundry creditors signed by the concerned creditors. In view of this fact,
it was to be opined that the ITAT had rightly come to the conclusion that
confirmations from the creditors were produced.”

 



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Appellate Tribunal : Ruling of Authority for Advance Rulings : Not binding on Tribunal : Tribunal can decide in consonance with ruling.

New Page 1

 2 Appellate
Tribunal : Ruling of Authority for Advance Rulings : Not binding on Tribunal :
Tribunal can decide in consonance with ruling.



[CIT v. P. Sekar Trust, 321 ITR
305 (Mad.)]

In this case the Tribunal had
decided an issue before it accepting the ruling of the Authority of Advance
Ruling in Advance Ruling P. No. 10 of 1996, In re (1997) 224 ITR 473 (AAR).

In the appeal filed by the
Revenue, the question raised was as to whether the Tribunal was justified in
following the decision in the Advance Ruling
Authority which does not have binding effect on the assessee’s case.

The Madras High Court held as
under :


“(i) The ruling of the
Authority for Advance Ruling is not binding on others, but there is no bar
on the Tribunal taking a view or forming an opinion in consonance with the
reasoning of the Authority for Advance Ruling de hors the binding nature.

(ii) Since the Tribunal had
not rested its decision on the ruling of the Authority for Advance Rulings,
but had taken in aid and relied on the decision of the Court, the question
of law did not arise for consideration from the order of the Tribunal.”

 



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Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 : Assessee company received funds from sister concern PE Ltd. for expansion of production capacity as advance for commercial purpose to be adjusted against monies payable by PE Ltd. in subsequent years

New Page 1

3. Deemed
dividend : S. 2(22)(e) of Income-tax Act, 1961 : Assessee company received funds
from sister concern PE Ltd. for expansion of production capacity as advance for
commercial purpose to be adjusted against monies payable by PE Ltd. in
subsequent years : Provisions of S. 2(22)(e) not attracted.


[CIT v. Creative Dyeing &
Painting (P) Ltd., 229 CTR 250 (Del.)]

The assessee company was engaged
in dyeing and printing of cloth and was acting as an ancillary unit of PE Ltd.,
a sister concern, for the last several years. In order to increase its export
business and to compete with the international standards and garment exports
M/s. PE Ltd. suggested modernisation and expansion of the plant and machinery of
the assessee company. Towards this project M/s. PE Ltd. paid to the assessee
company an amount equal to 50% of the project cost as advance to be adjusted
against the entitlement of the moneys of the assessee company payable by PE Ltd.
in the subsequent years. The Assessing Officer treated the said advance amount
as deemed dividend u/s.2(22)(e) of the Income-tax Act, 1961 and made addition
accordingly. The Tribunal deleted the addition, holding that the payment of an
advance for a commercial purpose to the assessee company by its sister concern
is not deemed dividend u/s.2(22)(e) of the Act.

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


“(i) The contention that
since PE Ltd. is not into the business of lending of money, the payments
made by it to the assessee company would be covered by S. 2(22)(e)(ii) and
consequently payments even for business transactions would be a deemed
dividend is not acceptable.

(ii) The provision of S.
2(22)(e)(ii) is basically in the nature of an Explanation. That cannot
however, have bearing on interpretation of the main provision of S. 2(22)(e)
and once it is held that the business transactions do not fall within S.
2(22)(e), one need not go further to S. 2(22)(e)(ii).

(iii) The provision of S.
2(22)(e)(ii) gives an example only of one of the situations where the
loan/advance will not be treated as a deemed dividend, but that’s all. The
same cannot be expanded further to take away the basic meaning, intent and
purport of the main part of S. 2(22)(e). This interpretation is in
accordance with the legislative intention of introducing S. 2(22)(e).

(iv) Therefore, the Tribunal
was correct in holding that the amounts advanced for business transaction
between the parties, namely, the assessee company and PE Ltd. was not such
to fall within the definition of deemed dividend u/s.2(22)(e).”


 

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Agricultural land : Capital Gain : Capital asset : S. 2(14)(iii) of Income-tax Act, 1961 : A.Y. 2001-02 : Measurement of distance from municipality : To be measured in terms of the approach by road and not by a straight-line distance on horizontal plane o

New Page 1

 1 Agricultural
land : Capital Gain : Capital asset : S. 2(14)(iii) of Income-tax Act, 1961 :
A.Y. 2001-02 : Measurement of distance from municipality : To be measured in
terms of the approach by road and not by a straight-line distance on horizontal
plane or as per crow’s flight.


[CIT v. Satinder Pal Singh, 229
CTR 82 (P&H)]

For the purposes of determining
as to whether an agricultural land constitutes a capital asset, the Tribunal
held that the distance from the municipal limits has to be measured as per the
road distance and not as per the straight-line distance on a horizontal plane or
as per crow’s flight.

On appeal by the Revenue, the
Punjab and Haryana High Court upheld the decision of the Tribunal.

 

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Unaccounted income : A.Y. 2001-02 : Value of closing stock given to bank higher than value as per books : Difference added as unaccounted income : Difference in value of closing stock should be reduced by similar difference in opening stock.

New Page 1

 12 Unaccounted income : A.Y. 2001-02 : Value of closing stock given to bank
higher than value as per books : Difference added as unaccounted income :
Difference in value of closing stock should be reduced by similar difference
in opening stock.


[CIT v. Capital Tyres Manufacturing Unit, 176 Taxman
178 (Delhi)]

For the A.Y. 2001-02 the AO found that the assessee had
hypothecated its stock with the bank for availing overdraft facility and that
the value of the stock declared to the bank was much higher than the value of
stock declared in its books of account. The AO rejected the assessee’s
explanation in respect of the difference and made an addition of the
difference as unaccounted income. The CIT(A) held that the addition made on
account of the difference of valuation of the closing stock has to be reduced
by the similar difference in the opening stock. The Tribunal confirmed the
decision of the CIT(A).

On appeal by the Revenue, the Delhi High Court
upheld the decision of
the Tribunal and held : “Both the authorities had taken into account the
opening and closing stock of last year and had rightly excluded the inflated
stock pertaining to the immediately preceding year. Thus, the approach of the
Tribunal could not be said to be perverse or erroneous.”


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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

New Page 1

 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.

New Page 1

 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.

New Page 1

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.

New Page 1

 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

New Page 2

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

New Page 2

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

New Page 2

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

New Page 2

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

New Page 2

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

New Page 2

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

New Page 1

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:

New Page 1

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.

New Page 1

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.

New Page 1

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

New Page 1

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.

New Page 1

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.

New Page 1

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.

New Page 1

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

New Page 1

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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