Category: Glimpses Of Supreme Court Rulings

The assessees had undertaken construction projects which were approved by the municipal authorities/local authorities as housing projects. On that basis, they claimed deduction u/s. 80IB(10) of the Act.

However, the income tax authorities rejected the claim of deduction on the ground that the projects were not “housing project” inasmuch as some commercial activity was also undertaken in those projects. This contention of the Revenue was not accepted by the Income-tax Appellate Tribunal as well as the High Court. The High Court interpreted the expression “housing project” by giving grammatical meaning thereto as housing project is not defined under the Income-tax Act insofar as the aforesaid provision is concerned. The High Court held that since sub-section (10) of section 80-IB very categorically mentioned that such a project which is undertaken as housing project is approved by a local authority, once the project is approved by the local authority it is to be treated as the housing project. The High Court had made observations in the context of Development Control Regulations (hereinafter referred to as ‘DCRs’ in short) under which the local authority sanctions the housing projects and noted that in these DCRs itself, an element of commercial activity is provided but the total project is still treated as housing project. The Supreme Court noted that on the basis of this discussion, after modifying some of the directions given by the ITAT , the conclusions arrived at by the High Court were as follows:-

a) Upto 31/3/2005 (subject to fulfilled other conditions), deduction u/s. 80-IB(10) is allowable to housing projects approved by the local authority having residential units with commercial user to the extent permitted under DC Rules/Regulations framed by the respective local authority.

b) I n such a case, where the commercial user permitted by the local authority is within the limits prescribed under the DC Rules/Regulation, the deduction u/s. 80- IB(10) upto 31/3/2005 would be allowable irrespective of the fact that the project is approved as ‘housing project’ or ‘residential plus commercial’.

c) I n the absence of any provision under the Income-tax Act, the Tribunal was not justified in holding that upto 31/3/2015 deduction u/s. 80-IB(10) would be allowable to the projects approved by the local authority having residential building with commercial user upto 10% of the total built-up area of the plot.

d) Since deductions u/s. 80-IB(10) is on the profits derived from the housing projects approved by the local authority as a whole, the Tribunal was not justified in restricting section 80-IB(10) deduction only to a part of the project. However, in the present case, since the assessee has accepted the decision of the Tribunal in allowing section 80-IB(10) deduction to a part of the project, the findings of the Tribunal in that behalf were not disturbed.

e) Clause (d) inserted to section 80IB(10) with effect from 1/4/2005 was prospective and not retrospective and hence could not be applied for the period prior to 1/4/2005.

The Supreme Court agreed with the aforesaid answers given by the High Court to the various issues. The Supreme Court however, clarified that in so far as answer at para (a) was concerned, it would mean those projects which were approved by the local authorities as housing projects with commercial element therein.

There was much debate on the answer given in para (b) above before the Supreme Court. It was argued by learned senior counsel, for the Revenue that a project which was cleared as “residential plus commercial” project could not be treated as housing project and therefore, this direction was contrary to the provisions of section 80-IB(10) of the Act. However, according to the Supreme Court reading the direction in its entirety and particularlly the first sentence thereof, the commercial user which was permitted was in the residential units and that too, as per DCR.

The Supreme Court clarified that direction (b) was to be read in the context where the project was predominantly housing/residential project but the commercial activity in the residential units was permitted.

The question of law that arose for consideration before the Supreme Court was formulated by it as under:

“Whether section 80-IB(10)(d) of the Income-tax Act, 1961, applies to a housing project approved before March 31, 2005, but completed on or after April 1, 2005”?

The Supreme Court observed that sub-section (10) of section 80IB stipulates certain conditions which are to be satisfied in order to avail of the benefit of the said provision. Further, the benefit is available to those undertakings which are developing and building “housing projects” approved by a local authority. Thus, this section is applicable in respect of housing projects and not commercial projects. At the same time, it is a fact that even in the housing projects, there would be some are for commercial purposes as certain shops and commercial establishments area needed even in a housing project.

That has been judicially recognised while interpreting the provision that existing before 1st April, 2005 in CIT vs. Veena Developers [SLP (c) No.22450/2011 dated 30-4- 2015], and there was no limit fixed in section 80-IB(10) regarding the built-up area to be used for commercial purpose in the said housing project. The extent to which such commercial area could be constructed was as per the local laws under which local authority gave the sanction to the housing project. However, vide clause (d), which was inserted by the aforesaid amendment and made effective from 1st April, 2005, it was stipulated that the built-up area of the shops and other commercial establishments in the housing projects would not exceed 5 % of the aggregate built-up area of the housing project or 2,000 square feet, whichever is less (there is a further amendment whereby 5 % is reduced to 3 % and instead of the words “2,000 square feet, whichever is less” the words “5,000 square feet, whichever is higher” have been substituted). According to the Supreme Court, the question, thus, that required for consideration was as to whether in respect of those housing projects which finished on or after 1st April, 2005, though sanctioned and started much earlier, the aforesaid stipulation contained to clause (d) also has to be satisfied. The Supreme Court noted that all the High Courts have held that since this amendment is prospective and has come into effect from 1st April, 2005, this condition would not apply to those housing projects which had been sanctioned and stared earlier even if they finished after 1st April, 2005.

The Supreme Court noted that with effect from 1st April, 2001, section 80-IB(10) stipulated that any housing project approved by the local authority before 31st March, 2001, was entitled to a deduction of 100 % of the profits derived in any previous year relevant to any assessment year from such housing project, provided—(i) the construction/ development of the said housing project commenced on after 1st October, 1998, and was completed before 31st March, 2003; (ii) the housing project was on a size of a plot of land which had a minimum area of one acre; and (iii) each individual residential unit had a maximum built-up area of 1,000 square feet, where such housing project was situated within the cities of Delhi or Mumbai or within 25 kms. from municipal limits of these cities, and a maximum built-up area of 1,500 square feet at any other place. Therefore, for the first time, a stipulation was added with reference to the date of approval, namely, that approval had to be accorded to the housing project by the local authority before 31st March, 2001. Before this amendment, there was no date prescribed for the approval being granted by the local authority to the housing project. Prior to this amendment, as long as the development/ construction commenced on or after 1st October, 1998, and was completed before 31st March, 2001, the assessee was entitled to the deduction. Also by this amendment, the date of completion was changed from 31st March, 2001, to 31st March, 2003. Everything else remained untouched.

Thereafter, by the Finance Act, 2003, further amendments were made to section 80-IB(10). The only changes that were brought about were that with effect from 1st April, 2002: (i) the housing project had to be approved before 31st March, 2005; and (ii) there was no time limit prescribed for completion of the said project. Though these changes were brought about by the Finance Act, 2003, the Legislature thought it fit tht these changes be deemed to have been brought into effect from 1st April, 2002. All the remaining provisions of section 80-IB(10) remained unchanged.

Thereafter, significant amendment, with which the Supreme Court was directly concerned, was carried out by the Finance (No.2) Act, 2004, with effect from 1st April, 2005. The Legislature made substantial changes in subsection (10). Several new conditions were incorporated for the first time, including the condition mentioned in clause (d). This condition/restriction was not on the statute book earlier when all these projects were sanctioned. Another important amendment was made by this Act to sub-section (14) of section 80-IB with effect from 1st April, 2005, and for the first time under clause (a) thereof the words “built-up area” were defined.

Prior to the insertion of section 80-IB(14)(a), in many of the rules and regulations of the local authority approving the housing project “built-up area” did not include projections and balconies. Probably, taking advantage of this fact, builders provided large balconies and projections making the residential units far bigger than as stipulated in section 80-IB(10), and yet claimed the deduction under the said provision. To plug this lacuna, clause (a) was inserted in section 80-IB(14) defining the words “built-up area” to mean the inner measurements of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls but did not include the common areas shared with other residential units.

According to the Supreme Court, the only way to resolve the issue was to hold that clause (d) is to be treated as inextricably linked with the approval and construction of the housing project and an assessee cannot be called upon to comply with the said condition when it is not in contemplation either of the assessee or even the Legislature, when the housing project was accorded approval by the local authorities.

The Supreme Court held that by way of an amendment in the form of clause (d), an attempt is made to restrict the size of the said shops and/or commercial establishments. Therefore, by necessary implication, the said provision has to be read prospectively and not retrospectively. As is clear from the amendment, this provision came into effect only from the day the provision was substituted. Therefore, it cannot be applied to those projects which were sanctioned and commenced prior to 1st April, 2005, and completed by the stipulated date, though such stipulated date is after 1st April, 2005. According to the Supreme Court, these aspects were dealt with by various High Courts elaborately and convincingly in their judgments and had taken a correct view that the assesses were entitled to the benefit of section 80-IB(10). The Supreme Court dismissed the appeals filed by the Revenue.

Section 24AA of the Surtax Act, vests in the Central Government the power to make exemption, reduction in rate or other modification in respect of surtax in favour of any class of foreign companies which are specified in s/s. (2), in regard to the whole or any part of the chargeable profits liable to tax under the Surtax Act. Sub-section (2) of section 24AA refers to two categories of foreign companies. The first is foreign companies with whom the Central Government has entered into agreements for association or participation, including participation by any authorised person, in any business consisting of the prospecting or extraction or production of mineral oils. The second category of foreign companies mentioned in s/s. (2) is foreign companies that may be providing services or facilities or supplying any ship, aircraft, machinery or plant in connection with any business of prospecting or extraction or production of mineral oils carried on by the Central Government or any authorised person. Specifically the section states that mineral oils will include petroleum and natural gas.

The exemption notification bearing No. G. S. R. 307(E), dated 31st March, 1983, specifically grants exemption in respect of surtax in favour of foreign companies with whom the Central Government has entered into agreements for association or participation of that Government or any authorised person in the business of prospecting or extraction or production of mineral oils.

The ONGC had executed agreements with different foreign companies for services or facilities or for supply of ship, aircraft, machinery and plant, as may be, all of which were to be used in connection with the prospecting or extraction or production of mineral oils. Such agreements did not contemplate a direct association or participation of the ONGC in the prospecting or extraction or production of mineral oils but involved the taking of services and facilities or use of plant or machinery which is connected with the business of prospecting or extraction or production of mineral oils.

In the above situation, the primary authority took the view that the agreements executed by the ONGC with the foreign companies being for services to be rendered and such agreements not being for association or participation in the prospecting or extraction or production of mineral oils, would not be covered by the exemption notification in question which by its very language granted exemption only to foreign companies with whom there were agreements for participation by the Central Government or the person authorised in the business of prospecting, extraction or production of mineral oils. The agreements in question, according to assessing authority, were, therefore “service agreements” and, hence, covered by sub-section (2)(b) of section 24AA of the Surtax Act and were, accordingly, beyond the purview of the exemption modification.

The said view was reversed by the learned Appellate Commissioner and upheld by the learned Income-tax Appellate Tribunal. In the appeal u/s. 260A of the Act, the High Court of Uttarakhand overturned the view taken by the Appellate Commissioner and the learned Tribunal.

The Supreme Court held that section 24AA of the Surtax Act vests power in the Central Government, inter-alia, to grant exemption to foreign companies with whom agreements have been executed by the Central Government for association or participation in the prospecting or extraction or production of mineral oils and also to foreign companies who are providing support services or facilities or making available plant and machinery in connection with the business of prospecting or extraction or production of mineral oils in which the Central Government or an authorised person is associated. In other words, the power to grant exemption is two-fold and covers agreements directly associated with the prospecting or extraction or production of mineral oils or contracts facilitating or making available services in connection with such a business. There is nothing in the provisions of the Act which could have debarred the Central Government from granting exemptions to both categories of foreign companies mentioned above or to confine the grant of exemption to any one or a specified category of foreign companies. The Notification No. G. S. R. 307(E), dated 31st March, 1983, however grants exemption only to foreign companies with whom the Central Government had executed agreements for direct association or participation by the Central Government or the person authorised by it (ONGC) in the prospecting or extraction or production of mineral oils. In other words, the exemption notification confines or restricts the scope of the exemption to only one category of foreign companies which has been specifically enumerated in sub-section (2)(a) of section 24AA of the Surtax Act. The Second category of foreign companies that may be providing services as enumerated in sub-section (2)(b) of section 24AA is specifically omitted in the exemption notification. The power u/s. 24AA of the Surtax Act, is wide enough to include even this category of foreign companies. The omission of this particular category of foreign companies in the exemption notification, notwithstanding the wide amplitude and availability of the power u/s. 24AA, clearly reflects a conscious decision on the part of the Central Government to confine the scope of the exemption notification to only those foreign companies that are enumerated in and covered by sub-section 2(a) of section 24AA of the Surtax Act.

The Supreme Court affirmed the orders of the High Court and dismissed the appeals.

The appellant – ONGC and a non-resident/foreign company one M/s. Foramer France had entered into an agreement by which the non-resident company had agreed to make available supervisory staff and personnel having experience and expertise for operation and management of drilling rigs Sagar Jyoti and Sagar Pragati for the assessment year 1985-86 and the drilling rig Sagar Ratna for the assessment year 1986-87.

The appellant – ONGC has been assessed in a representative capacity on behalf of the foreign company with whom it had executed agreements for services to be rendered by such company in connection with prospecting extraction or production of mineral oils by ONGC. The primary/assessing authority took the view that the assessments should be made u/s. 44D of the Act and not section 44BB of the Act. The Appellate Commissioner and the Income-tax Appellate Tribunal disagreed with the views of the assessing authorities leading to the institution of appeal before the High Court of Uttarakhand. The High Court overturned the view taken by the Appellate Commissioner and the Tribunal and held the payments made to be liable for assessment u/s. 44D of the Act.

The High Court took the view that under the agreement, payment to M/s. Foramer France was required to be made at the rate of 3,450 $ per day and that the contract clearly contemplated rendering of technical services by personnel of the non-resident company as the contract did not mention that the personnel of the non-resident company were also carrying out the work of drilling of wells and as the company had received fees for rendering service, the payments made were liable to be taxed under the provisions of section 44D of the Act.

Aggrieved, the ONGC has filed appeal before the Supreme Court.

The Supreme Court held that a careful reading of the provisions of the Act goes to show that u/s. 44BB(1) in the case of a non-resident providing services or facilities in connection with or supplying plant and machinery used or to be used in prospecting, extraction or production of mineral oils the profit and gains from such business chargeable to tax is to be calculated at a sum equal to 10 per cent of the aggregate of the amounts paid or payable to such non-resident assessee as mentioned in s/s. (2). On the other hand, section 44D contemplates that if the income of a foreign company with which the Government or an Indian concern had an agreement executed before 1st April, 1976, or on any date thereafter but before April, 2003 the computation of income would be made as contemplated under the aforesaid section 44D. Explanation (a) to section 44D, however, specifies that “fees for technical services” as mentioned in section 44D would have the same meaning as in Explanation 2 to clause (vii) of section 9(1). The said Explanation, defines “fees for technical services” to mean consideration for rendering of any managerial, technical or consultancy services. However, the later part of the Explanation excludes from consideration for the purposes of the expression, i.e., “fees for technical services” any payment received for construction, assembly, mining or like project undertaken by the recipient or consideration which would be chargeable under the head “Salaries”. Fees for technical services, therefore, by virtue of the aforesaid Explanation would not include payments made in connection with a mining project.

The Supreme Court noted that the Income-tax Act does not define the expressions “mines” or “minerals”. The said expressions however were found defined and explained in the Mines Act, 1952, and the Oil Fields (Development and Regulations) Act, 1948. The Supreme Court having regard to the said definition and to the Seventh Schedule of the Constitution, held that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it was the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or a mining operation that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed u/s. 44BB or section 44D of the Act. The Supreme Court noted that the Central Board of Direct Taxes had accepted the said test and had in fact issued a Circular as far back as 22nd October, 1990, to the effect that mining operations and the expressions “mining projects” or “like projects” occurring in Explanation 2 to section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and, hence, payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of section 44BB and not section 44D of the Act.

According to the Supreme Court, it was not possible to take any other view if the works or services mentioned under a particular agreement was directly associated or inextricably connected with prospecting, extraction or production of mineral oils. Keeping in mind the above provisions and looking into each of the contracts involved in the group of cases before it, it found that the pith and substance of each of the contracts/agreements was inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement was for prospecting, extraction or production of mineral oils though there would be certain ancillary works contemplated thereunder. The Supreme Court therefore held that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts was more appropriately assessable under the provisions of section 44BB and not section 44D of the Act.

The assessee, a private limited company, had an industrial unit at Majiwada, Thane, which was notified urban area as per notification dated 22nd September, 1967 issued u/s. 280Y(d) for the purpose of Chapter XXII-B. With a view to shift its industrial undertaking from an urban area to a non-urban area at Kurukumbh Village, Pune District, Maharashtra, it sold its land, building and plant and machinery situated at Majiwada, Thane to Shree Vardhman Trust for a consideration of Rs.1,20,00,000, and after deducting an amount of Rs.11,62,956, had earned a capital gain of Rs.1,08,33,044. Since it intended to shift its industrial undertaking from an urban area to a non-urban area, out of the capital gain so earned, the appellant paid by way of advances, various amounts to different persons for purchase of land, plant and machinery, construction of factory building, etc. Such advances amounted to Rs.1,11,42,973 in the year 1991-92. The appellant claimed exemption u/s. 54G of the Income-tax Act on the entire capital gain earned from the sale proceeds of its erstwhile industrial undertaking situated in Thane in view of the advances so made being more than the capital gain made by it. Section 54G was introduced by the Finance Act, 1987 with effect from assessment year 1988-89.

The Assessing Officer imposed a tax on capital gains, refusing to grant exemption to the appellant u/s. 54G. According to the Assessing Officer, non-urban area had not been notified by the Central Government and therefore the plea of shifting the non-urban area could not be accepted. Further, it could not be said that giving advance to different concerns meant utilisation of money for acquiring the assets. Hence, failure to deposit the capital gain in the Capital Gains Deposit Account by the assessee the claim could not be allowed.

The Commissioner of Income-tax (Appeals) dismissed the appellant’s appeal. The Income-tax Appellate Tribunal however, allowed the assessee’s appeal stating that even an agreement to purchase is good enough and that the Explanation to section 54G being declaratory in nature would be retrospective.

The High Court reversed the judgment of the Incometax Appellate Tribunal and held that as the notification declaring Thane to be an urban area stood repealed with the repeal of the section under which it was made, the appellant did not satisfy the basic condition necessary to attract section 54G, namely, that a transfer had to be made from an urban area to a non-urban area. Further, the expression “purchase” in section 54G could not be equated with the expression “towards purchase” and, therefore, admittedly as land, plant and machinery had not been purchased in the assessment year in question, the exemption contained in section 54G had to be denied.

The Supreme Court held that on a conjoint reading of the Budget Speech, Notes on clauses and Memorandum Explaining the Finance Bill of 1987, it was clear that the idea of omitting section 280ZA and introducing on the same date section 54G was to do away with the tax credit certificate scheme together with the prior approval required by the Board and to substitute the repealed provision with the new scheme contained in section 54G. It was true that section 280Y(d) was only omitted by the Finance Act, 1990, and was not omitted together with section 280ZA. However, this would make no material difference inasmuch as section 280Y(d) was a definition section defining ‘urban area” for the purpose of section 280ZA only and for no other purposes. It was clear that once section 280ZA was omitted from the statute book, section 280Y(d) had no independent existence and would for all practical purposes also be “dead”. Quite apart from this, section 54G(1) by its Explanation introduced the very definition contained in section 280Y(d) in the same terms. Obviously, both provisions were not expected to be applied simultaneously and it was clear that the Explanation to section 54G(1) repealed by implication section 280Y(d). Further, from a reading of the Notes on Clauses and the Memorandum of the Finance Bill, 1990, it was clear that section 280Y(d) which was omitted with effect from 1st April 1, 1990, was so omitted because it had become “redundant”. It was redundant because it had no independent existence, apart from providing a definition of “urban area” for the purpose of section 280ZA which had been omitted with effect from the very date that section 54G was inserted, namely, 1st April, 1988.

The Supreme Court further held that the idea of section 24 of the General Clauses Act is, as its marginal note shows, to continue uninterrupted subordinate legislation that may be made under a Central Act that is repealed and re-enacted with or without modification. It being clear in the present case that section 280ZA which was repealed by omission and re-enacted with modification in section 54G, the notification declaring Thane to be an urban area dated 22nd September, 1967, would continue under and for the purposes of section 54G. It was clear, therefore, that the impugned judgment in not referring to section 24 of the General Clauses Act at all had thus fallen into error.

The Supreme Court for all the aforesaid reasons was therefore, of the view that on omission of section 280ZA and its re-enactment with modification in section 54G, section 24 of the General Clauses Act would apply, and the notification of 1967, declaring Thane to be an urban area, would be continued under and for the purposes of section 54G. The Supreme Court held that a reading of section 54G makes it clear that the assessee is given a window of three years after the date on which transfer has taken place to “purchase” new machinery or plant or “acquire” building or land. The High Court had completely missed the window of three years given to the assessee to purchase or acquire machinery and building or land. This is why the expression used in section 54G(2) is “which is not utilised by him for all or any of the purposes aforesaid.” According to the Supreme Court, it was clear that for the assessment year in question all that was required for the assessee to avail of the exemption contained in the section was to “utilize” the amount of capital gains for purchase and acquisition of new machinery or plant and building or land. It was undisputed that the entire amount claimed in the assessment year in question had been so “utilized” for purchase and/or acquisition of new machinery or plant and land or building. If the High Court was right, the assessee had to purchase and/or acquire machinery, plant, land and building within the same assessment year in which the transfer takes place. Further, the High Court missed the key words “not utilized” in sub-section (2) which would show that it was enough that the capital gain made by the assessee should only be “utilized” by him in the assessment year in question for all or any of the purposes aforesaid, that is towards purchase and acquisition of plant and machinery, and land and building. Advances paid for the purpose of purchase and/or acquisition of the aforesaid assets would certainly amount to utilisation by the assessee of the capital gains made by him for the purpose of purchasing and/or acquiring the aforesaid assets.

In the first judgment of the High Court dated 16th September, 2010, various points on the merits were gone into, inter alia, as to whether deductions to be made u/s. 80-IB of the Income-tax Act, 1961, were allowable on facts and whether transport subsidies were or were not available together with other incentive. Ultimately, the High Court after stating in paragraph 2 that two substantial questions of law arose u/s. 260A of the Income-tax Act went on to answer the two questions. The first question so framed was answered in the negative, that is in favour of the Revenue, and against the assessee. However, the second question was answered in the affirmative, in favour of the assessee, and against Revenue, and the appeal was disposed of in the aforesaid terms.

Against the aforesaid judgment dated 16th September, 2010, a Review Petition was filed by the assessee before the very Division Bench. In a long judgement dated 8th April, 2013, the Division Bench recalled its earlier order dated 16th September, 2010 for the reason that there was an omission to formulate the substantial questions of law. Before the Supreme Court Learned Senior Advocate appearing on behalf of the Revenue, assailed the aforesaid judgment dated 8th April, 2013, stating that it was factually incorrect that no substantial question of law have been framed and that such questions were to be found in the very beginning of the judgment dated 16th September, 2010, itself. He further argued, referring to section 260A(7), that only those provisions of the Civil Procedure Code could be looked into for the purposes of section 260A as were relevant to the disposal of appeals, and since the review provision contained in the Code of Civil Procedure were not so referred to, the High Court would have no jurisdiction u/s. 260A to review such judgment.

The Supreme Court noted that by the review order dated 8th April, 2013, the Division Bench felt that it should not have gone into the matter at all given the fact that on an earlier occasion, before 16th September, 2010, it had reserved the judgment on whether substantial questions of law in fact exist at all or not. This being the case, in a lengthy order the Division Bench has thought it fit to recall its own earlier judgment.

The Supreme Court in such circumstances was not inclined to interfere with the judgment in view of what had been recorded in the impugned judgment dated 8th April, 2013. The Supreme Court further held that High Courts being courts of record under article 215 of the Constitution of India, the power of review would in fact be inherent in them. Also on reading of section 260A(7), it was clear that the said section did not purport in any manner to curtail or restrict the application of the provisions of the Code of Civil Procedure. Section 260A(7) only states that all the provisions that would apply qua appeals in the Code of Civil Procedure would apply to appeals u/s. 260A. That does not in any manner suggest either that the other provisions of the Code of Civil Procedure are necessarily excluded or that the High Court’s inherent jurisdiction is in any manner affected.

The appellant was assessed to wealth-tax under the Act for the assessment years 1977-78 to 1986-87. The valuation of the property which was the subject matter of wealth-tax under the Act was the urban land appurtenant to the Bangalore Palace (hereinafter referred to as “the property”). The total extent of the property was 554 acres or 1837365.36 sq. mtrs. It comprised of residential units, non-residential units and land appurtenant thereto, roads and masonry structures along the contour and the vacant land. The vacant land measured 11,66,377.34 sq.mtrs. The aforesaid property was the private property of the late Sri Jaychamarajendra Wodeyar, the former ruler of the princely State of Mysore. He died on 23rd September, 1974. After the death of Sri Jaychamarajendra Wodeyar, his son Sri Srikantadatta Wodeyar, the assessee applied to the Settlement Commission to get the dispute settled with regard to valuation of property and lands appurtenant thereto for the assessment years 1967-68 to 1976-77.

The application of the assessee before the Settlement Commission for the assessment years 1967-68 to 1976- 77 was disposed of on 29th September, 1988 laying down norms for valuation of the property. The Wealthtax Officer adopted the value as per the Settlement Commission for the assessment years 1976-77, 1977- 78 and 1978-79 at Rs.13.18 crore (for both land and buildings). For the assessment year 1979-80, since there was no report of the Valuation Officer, the Commissioner of Income-tax (Appeals) worked out the value of the property at Rs.19.96 crore for the assessment year 1979- 80, which was adopted by the Wealth-tax Officer for the assessment year 1980-81 as well. For the assessment years 1981-82, 1982-83 and 1983-84, the Wealth-tax Officer fixed the value of land and building at Rs.18.78 crore, Rs.29.85 crore and Rs.29.85 crore, respectively. For the assessment year 1984-85, the Wealth-tax Officer took the value at Rs.31.22 crore on the basis of the order passed by the Commissioner (Appeals) for earlier years.

The orders of the Wealth-tax Officer passed under the Act fixing the value of the land for different assessment years for the purpose of the Act was challenged by the assessee before the Commissioner (Appeals). In these appeals, the contention of the assessee was that the value of the property was covered by the Ceiling Act for which maximum compensation that could be received by the assessee was only Rs.2 lakh. The appeals filed for the assessment years, namely, 1980-81, 1982-83 and 1983- 84 were disposed of by the Commissioner of Income-tax (Appeals) by a common order dated 9th January, 1990, in which he made slight modifications to value adopted for the assessment year 1981-82 and confirmed the valuation of the Wealth-tax Officer for the assessment years 1982-83 and 1983-84. However, in respect of appeals relating to the assessment years 1977-78 to 1980-81, the Commissioner (Appeals) passed the orders dated 31st July, 1990, accepting that the urban land appurtenant to the property be valued at Rs.2,00,000. Similar orders came to be passed by the Commissioner of Incometax (Appeals) for the assessment years 1984-85 and 1985-86 also. Against these orders of the Commissioner (Appeals), both the assessee as well as the Revenue/ Department went up in appeals before the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore.

The issue before the Income-tax Appellate Tribunal was only with regard to the valuation of vacant land attached to the property since the assessee had accepted the valuation in regard to residential and non-residential structures within the said property area and appurtenant land thereto.

The Income-tax Appellate Tribunal, Bangalore, passed the order directing the vacant land be valued at Rs.2 lakh for each year from the assessment years 1977-78 to 1985-86. Its reasoning was that the competent authority under the Ceiling Act had passed an order determining that the vacant land was in excess of the ceiling limit, and had ordered that action be taken to acquire the excess land under the Karnataka Town and Country Planning Act, 1901. And under the Land Ceiling Act, an embargo was placed on the assessee to sell the subject land and exercise full rights. The assessee was only eligible to maximum compensation of Rs.2 lakh under the Ceiling Act. Hence, given these facts and circumstances the subject land could only be valued at Rs.2 lakh for wealthtax purposes on the valuation date for the assessment years 1977-78 to 1985-86.

Against the order of the Tribunal, the Commissioner of Wealth-tax sought reference before the Karnataka High Court in respect of the assessment years, namely, 1977-78 to 1985-86 arising out of the consolidated order of the Tribunal.

The High Court, vide the impugned order dated 13th June, 2005 holding that although the prohibition and restriction contained in the Ceiling Act had the effect of decreasing the value of the property, still the value of the land cannot be the maximum compensation that is payable under the provision of the Ceiling Act. Thus, the question referred had been answered against the assessee.

The Supreme Court observed that the valuation of the asset in question has to be in the manner provided u/s. 7 of the Act. Such a valuation has to be on the valuation date which has reference to the last day of the previous year as defined u/s. 3 of the Income-tax Act, if an assessment was to be made under that Act for that year. In other words, it is 31st March, immediately preceding the assessment year. The valuation arrived at as on that date of the asset is the valuation on which wealth-tax is assessable. It is clear from the reading of section 7 of the Act that the Assessing Officers has to keep hypothetical situation in mind, namely, if the asset in question is to be sold in the open market, what price it would fetch. The Assessing Officer has to form an opinion about the estimation of such a price that is likely to be received if the property were to be sold. There is no actual sale and only a hypothetical situation of a sale is to be contemplated by the Assessing Officers. The tax officer has to form an opinion about the estimated price if the asset were to be sold in the assumed market and the estimated price would be the one which an assumed wiling purchaser would pay for it. On these reckoning, the asset has to be valued in the ordinary way.

The Supreme Court noted that the effect of the provisions of the Urban Land (Ceiling and Regulation) Act, 1976 in the context of instant appeals was that the vacant land in excess of the ceiling limit was not acquired by the State Government as notification u/s. 10(1) of the Ceiling Act had not been issued. However, the process had started as the assessee had filed statement in the prescribed form as per the provisions of section 6(1) of the Ceiling Act and the competent authority had also prepared a draft statement u/s. 8 which was duly served upon the assessee. The fact remained that so long as the Act was operative, by virtue of section 3 the assessee was not entitled to hold any vacant land in excess of the ceiling limit. Order was also passed to the effect that the maximum compensation payable was Rs.2 lakh.

The Supreme Court held that the Assessing Officer took into consideration the price which the property would have fetched on the valuation date, i.e., the market price, as if it was not under the rigours of the Ceiling Act. Such estimation of the price which the asset would have fetched if sold in the open market on the valuation date(s), would clearly be wrong even on the analogy/rationale given by the High Court as it accepted that restrictions and prohibitions under the Ceiling Act would have depressing effect on the value of the asset. Therefore, the valuation as done by the Assessing Officer could not have been accepted. The Supreme Court observed that it was not oblivious of those categories of buyers who may buy “disputed properties” by taking risks with the hope that legal proceedings may ultimately be decided in favour of the assessee and in such a eventuality they were going to get much higher value. However, as stated above, hypothetical presumptions of such sales are to be discarded as one has to keep in mind the conduct of a reasonable person and “ordinary way” of the presumptuous sale.

The Supreme Court held that when such a presumed buyer is not going to offer more than Rs.2 lakh, the obvious answer is that the estimated price which such asset would fetch if sold in the open market on the valuation date(s) would not be more than Rs.2 lakh. The Supreme Court having held so pointed out one aspect which was missed by the Commissioner (Appeals) and the Tribunal as well while deciding the case in favour of the assessee. The compensation of Rs.2 lakh was in respect of only the “excess land” which was covered by sections 3 and 4 of the Ceiling Act. The Supreme Court held that the total vacant land for the purpose of the Wealth-tax Act is not only excess land but other part of the land which would have remained with the assessee in any case. Therefore, the valuation of the excess land, which was the subject matter of the Ceiling Act, would be Rs.2 lakh. To that market value of the remaining land would have to be added for the purpose of arriving at the valuation for payment of wealth-tax. 

By a notice dated 29th June 1994, the Stock Exchange, Bombay declared one Shri Suresh Damji Shah as a defaulter with immediate effect as he had failed to meet his obligations and discharge his liabilities. By a notice dated 5th October 1995 issued u/s. 226 (3) of the Incometax Act, the Income-tax Department wrote to the Stock Exchange and told them that Shri Shah’s membership card being liable to be auctioned, the amount realised at such auction should be paid towards Income-tax dues of Assessment Year 1989-90 and 1990-91 amounting to Rs.25.43 lakh. The Stock Exchange, Bombay by its letter dated 11th October, 1995 replied to the said notice and stated that under Rules 5 and 6 of the Stock Exchange the membership right is a personal privilege and is inalienable. Further, under Rule 9 on death or default of a member his right of nomination shall cease and vest in the Exchange and accordingly the membership right of Shri Shah has vested with the Exchange on his being declared a defaulter. This being the case, since the Exchange is now and has always been the owner of the membership card, no amount of tax arrears of Shri Shah are payable by it. By a prohibitory order dated 10th May, 1996, the Incometax Department prohibited and restrained the Stock Exchange from making any payment relating to Shri Shah to any person whomsoever otherwise than to the Incometax Department. The amount claimed in the prohibitory order was stated to be Rs. 37.48 lakh plus interest. On 18th July, 1996, the Solicitors of the Stock Exchange, Bombay wrote to the Income-tax Department calling upon them to withdraw the prohibitory order dated 10th May, 1996 in view of the fact that the membership right of the Exchange is a personal privilege and is inalienable. By a letter dated 27th December, 1996, the Tax Department wrote back to the Bombay Stock Exchange refusing to recall its prohibitory order. Meanwhile, Shri Shah applied to be re-admitted to the Stock Exchange which application was rejected by the Stock Exchange on 13th February, 1997.

The Stock Exchange then filed a Writ Petition being Writ Petition No. 220 of 1997 dated 24th December, 1997.

By a judgment dated 27th March 2003, most of the contentions of the Stock Exchange were rejected and the Writ Petition was dismissed.

The judgment set out two main issues which according to it arose for determination. They were:

[A] Whether, on the facts and circumstances of this case, the TRO was right in attaching the sale proceeds of the nomination rights of the Defaulter-Member. If not, whether the TRO was entitled to attach under Rule 26(1) of Schedule–II to the Income-tax Act, the Balance Surplus amount lying with BSE out of the sale proceeds of the nomination rights of the Defaulter-Member under rule 16(1)(iii) framed by BSE r/w the Resolution of the General Body of BSE dated 13-10-1999?

[B] Whether deposits made by the Defaulting Member under various Heads such as Security Deposit, Margin Money, Securities deposited by Members and Others are attachable u/s. 226(3)(i)(x) read with Rule 26(1)(a)(c) of Schedule-II to the Income-tax Act?

Issue A was answered by saying that though a defaulting member had no interest in a membership card and that the Income-tax Department was not right in attaching the sale proceeds of such card, still money which is likely to come in the hands of the garnishee, that is the Bombay Stock Exchange, for and on behalf of the assessee is attachable because the requisite condition is the subsistence of an ascertained debt in the hands of the garnishee which is due to the assessee, or the existence of a contractual relationship between the assessee and the Stock Exchange consequent upon which money is likely to come in the hands of the garnishee for and on behalf of the assessee.

Issue B was answered by saying that even on vesting of all the assets of the assessee in the defaulter’s committee, all such assets continued to belong to the assessee. Section 73(3) Civil Procedure Code mandates that Government debts have a priority and that being so they will have precedence over other dues. It was further held that the lien that the Stock Exchange may possess under Rule 43 does not make it a secured creditor so that debts due to the Income-tax Department would have precedence.

The judgment then went on to say:

“11. To sum up, we hereby declare:

(a) That, the Other Assets (as described in Issue B hereinabove) are attachable and recoverable under provisions of section 226(3)(i)(x) read with Rule 26(1) (a)(c) of Schedule-II to the Income Tax Act.

(b) That, the Government and Other Creditors such as BSE, the Clearing House and Other Creditor-Members under Rules and Bye-laws of the Stock Exchange are creditors of equal degree and u/s. 73(3), Civil Procedure Code, the Government dues shall have priority over other such creditors.

(c) That, in the matter of application of Defaulters’ Asset under bye-law 400, the Defaulters’ Committee shall give priority to the debt due to the Government and the balance, if any, shall be distributed in terms of the Bye-laws 324 alongwith Byelaw 400 of the BSE.

(d) That, a sum of Rs. 34,06,680 representing Balance Surplus lying with the Exchange out of sale proceeds of the nomination rights of the Defaulter-Member is attachable under the above provisions of the Income -tax Act read with Rule 16 of the BSE Rules and consequently, the said amount is directed to be paid over to the TRO under the impugned Prohibitory Order.

(e) We hereby direct the BSE also to hand the securities lying in Members Security Deposit Accounts to the TRO, who would be entitled to sell and appropriate the sale proceeds towards the claim of the Income-tax Department against the Defaulting Broker-Member. If the TRO so direct, those securities could also be sold by BSE and the realised value, on the date of the sale, could be handed over to the TRO. It is for the TRO to decide this point. We further direct credit balance its the Clearing House of Rs. 1,53,538/- to be paid over to the TRO and that the TRO would be entitled to appropriate the said amount towards the dues of the Department. In short, we are directing BSE to pay a sum of Rs. 35,60,218/- to the TRO and in addition thereto, the TRO would be entitled to the realised value of the Securities as on the date of sale. In this case, the Prohibitory Order is before the date of insolvency of the Broker concerned.

(f) In future, the principles laid down by this judgment should be followed by BSE and the TRO would to attach such Other Assets and appropriate the amounts towards its claim under the Income Tax Act.”

A Special Leave Petition was filed against the said judgment being SLP(Civil) No. 8245 of 2003 in which, by an order dated 7th May 2003, the operation of the judgment was not stayed to the extent that it specifically directed the petitioner to make certain payments and handover securities to the Income-tax Department. However, in so far as the judgment declared law, the operation of such declaration of law was stayed.

The Counsel appearing on behalf of the Stock Exchange made essentially three submissions:

(i)    By virtue of the judgment in Stock Exchange, Ahmedabad vs. Asstt. Commisioner of Income Tax, Ahmedabad, [(2001) 248 ITR 209 (SC)], the sale proceeds of a membership card and the membership card itself being only a personal privilege granted to a member cannot be attached by the Income-tax Department at any stage. The moment a member is declared a defaulter all rights qua the membership card of the member cease and even his right of nomination vests in the Stock Exchange. The High Court was therefore not correct in saying that though a membership card is only a personal privilege and ordinarily the Income-tax Department cannot attach the sale proceeds, yet since these amounts came into the hands of the Stock Exchange for and on behalf of the assessee they were attachable.

(ii)    On conjoint reading of Rule 38 and 44 it was argued that all securities in the form of shares that are given by a member shall be transferred and held either in the name of the trustees of the Stock Exchange or in the name of a Bank which is approved by the Governing Board. By operation of Rule 44, on termination of the membership of a broker, whatever remains by way of security after clearing all debts has to be “transferred” either to him or as he shall direct or in the absence  of such direction to his legal representatives. The argument therefore is that what is contemplated is a transfer of these shares by virtue of which the member ceases to be owner of these shares for the period that they are “transferred” and this being so, the Income- tax Department cannot lay their hands on these shares or the sale proceeds thereof as the member ceases to have ownership rights of these shares.

(iii)    It was also argued that by virtue of Rule 43, the Stock Exchange has a first and paramount lien for any sum due to it, and that this made it a secured creditor so that in any case income tax dues would not to be given preference over dues to secured creditors.

The Supreme Court dealt with each one of the contentions and held as under:

Re.: (1)
A reading of Rules 5 and 9 lead to the conclusion that    a membership card is only a personal permission from the Stock Exchange to exercise the rights and privileges that may be given subject to Rules, Bye-Laws and Regulations of the Exchange. Further, the moment a member is declared a defaulter, his right of nomination shall cease and vest in the Exchange because even the personal privilege given is at that point taken away from the defaulting member.

Further, the rules and the bye-laws also make  this  clear. Under Rule 16(iii), whenever the  Governing  Board exercises the right of nomination in respect of a membership which vests in the Exchange, the ultimate surplus that  may  remain  after  the  membership  card  is sold by the Exchange comes only to the Exchange – it does not go to the member. This is in contrast with bye-law 400 (ix) which, deals with the application of the defaulting member’s other assets  and  securities,  and in this case ultimately the surplus is paid only to the defaulting member, making it clear that these amounts really belonged to the defaulting member.

The conclusion of the High Court that the proceeds of    a card which has been auctioned can be paid over to  the Income-tax Department for the dues of the member by virtue of Rule 16 (iii) is incorrect as such member     at no point owns any property capable of attachment,   as has been held in the Ahmedabad Stock Exchange case(supra).

Re: (2)
Rules 36 to 46 belong to a Chapter in the Rules entitled “Membership Security”. Rule 36 specifies that a new member shall on admission provide security and shall maintain such  security  with  the  Stock  Exchange  for  a determined sum at all the times that he carries on business. Rule 37 deals with the form of such security and states that it may be in the form of a deposit of cash or deposit receipt of a Bank or in the form of security approved by the Governing Board. Rule 38 deals with how these securities are held. Rule 41 enables the member to withdraw any security provided by him if he provides another security in lieu thereof of sufficient value to the satisfaction of the Governing Board. Rule 43 states that the security provided shall be a first and paramount lien for any sum due to the Stock Exchange and Rule  44 deals with the return of such security under certain circumstances. On a conjoint reading of these Rules what emerges is as follows:

(i)    The entire Chapter deals only with security to be provided by a member as the Chapter heading states;

(ii)    The security to be furnished can be in various forms. What is important is that cash is in the form of a deposit and securities are also “deposited” with the Stock Exchange under Rule 37;

(iii)    Rule 38 which is crucial provides how securities are to be “held” which is clear from the marginal note appended to it. What falls for construction is the expression “securities shall be transferred to and held”. Blacks Dictionary defines “transfer” as follows:

“Transfer means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of  or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption.”

It is clear therefore that the expression “transfer” can depending upon its context mean transfer of ownership or transfer of possession. It is clear that what is transferred is only possession as the member  only  “deposits”  these securities. Further, as has been held in Vasudev Ramchandra Shelat vs. Pranlal Jayanand Thakur &  Ors., 1975 (2) SCR 534 at 541, a share transfer can    be accomplished by physically transferring or delivering a share certificate together with a blank transfer form signed by the transferor. The transfer of shares in favour of the Stock Exchange is only for the purposes of easy liquidity in the event of default.

(iv)    The expression “transferred” must take colour from the expression “lodged” in Rule 38 when it comes to deposits of cash. Understood in this sense, transfer only means delivery for the purposes of holding such shares as securities;

(v)    This is also clear from the language of Rule 38 when it says “such deposit shall be entirely at the risk of the member providing the security ………..” Obviously, first and foremost the cash lodged and the shares transferred are only deposits. Secondly, they are entirely at the risk of the member who provides the security making it clear that such member continues to be the owner of the said shares by way of security for otherwise they cannot possibly be at the member’s risk;

(vi)    Under Rule 41 a member may withdraw any security provided by him if he satisfies the conditions of the Rules. This again shows that what is sought to be withdrawn is a security which the member owns;

(vii)    By Rule 43 a lien on securities is provided to the Stock Exchange. Such lien is only compatible with the member being owner of the security, for otherwise no question arises of an owner (the Stock Exchange, if the Counsel is right) having a lien on its own moveable property;

(viii)    Therefore, when Rule 44 speaks of repayment and transfer it has to be understood in the above sense as the security is being given back to the member under the circumstances mentioned in the Rule;

(ix)    Bye-law 326 and 330 also refer to securities that are “deposited” by the defaulter and recovery of securities and “other assets” due. Obviously, therefore, securities which are handed over to the exchange continue to be assets of the member which can be liquidated on default.

(x)    The Counsel’s argument would also create a dichotomy between “cash lodged” and Bank Deposit Receipts and securities  “transferred.”  The  form  a  particular security takes cannot possibly lead to a conclusion that cash lodged, being only a deposit, continues to belong to the member, whereas Bank Deposit Receipts and securities, being “transferred” would belong to the Stock Exchange.

Though the judgment in Bombay Stock Exchange vs. Jaya I. Shah [(2004) 1 SCC 160] had no direct application to the facts it did held that after the assets of the defaulting member are pooled together and amounts are realized, the payments that would be made from such pool would be from the assets of the defaulting member. To that extent, therefore, the aforesaid judgment reinforces what has been stated above.

Re: (3)
The first thing to be noticed is that the Income Tax Act does not provide for any paramountcy of dues by way of income tax. This is why the Court in Dena Bank’s case [(2001) 247 ITR 165 (SC)] held that Government dues only have priority over unsecured debts and in so holding the Court referred to a judgment in Giles vs. Grover (1832)(131) English Reports 563 in which it has been held that the Crown has no precedence over a pledgee of goods.

In the present case, the common law of England qua Crown debts became applicable by virtue of Article 372 of the Constitution which states that all laws in force in the territory of India immediately before  the commencement of the Constitution shall continue in force until altered or repealed by a competent legislature or other competent authority. In fact, in Collector of Aurangabad and Anr. vs. Central Bank of India and Anr. [(1968 21 STC 10 (SC)] after referring to various authorities held that the claim of the Government to priority for arrears of income tax dues stems from the English common law doctrine of priority of Crown debts and has been given judicial recognition in British India prior to 1950 and was therefore “law in force” in the territory of India before the Constitution and was continued by Article 372 of the Constitution (at page 861, 862).

In the present case, the lien possessed by the Stock Exchange makes it a secured creditor. That being the case, it is clear that whether the lien under Rule 43 is a statutory lien or is a lien arising out of agreement does not make much of a difference as the Stock Exchange, being a secured creditor, would have priority over Government dues.

The Supreme Court answered the three issues as above. The Supreme Court allowed the Stock Exchange’s appeal and the set aside the impugned judgment passed by the Division Bench of the Bombay High Court.

The assessee filed its return of income for A.Y. 2000- 01. The assessee claimed deduction u/s.80HHE to the extent of Rs.1,56,33,719 against net profit as per profit and loss account amounting to Rs.3,07,84,105 to arrive at the book profit of Rs.1,51,50,386 u/s.115JA of the Income-tax Act, 1961. This claim for deduction made by the assessee was rejected by the AO.

According to the AO, since in the present case in normal computation no net profit was left after brought-forward losses of the earlier years got adjusted against the current year’s profit, the assessee was not entitled to deduction u/s.80HHE to the extent of Rs.1,56,33,719 for computing book profit u/s.115JA. In Appeal, the CIT(A) upheld the order of the AO. The assessee went in appeal, against the order of the CIT(A), before the Tribunal which, following the judgment of the Special Bench of the Tribunal in the case of Deputy Commissioner of Income-tax, Range 8(3) v. Syncome Formulations (1) Limited, [(2007) 106 ITD 193], took the view that the MAT scheme which includes section 115JA did not take away the benefits given u/s.80HHE. The said judgment of the Special Bench was with regard to computation of deduction u/s.80HHC which, like section 80HHE, fell under Chapter VI-A of the Income Tax Act, 1961.

The High Court upheld the judgment of the Tribunal. On further appeal, the Supreme Court observed that in the said judgment of Special Bench, which Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings squarely applied to the facts of the present case, the Tribunal had held that the deduction u/s.80HHC (section 80HHE also fell in Chapter VI-A) had to be worked out not on the basis of regular income tax profits, but it had to be worked out on the basis of the adjusted book profits in a case where section 115JA was applicable. In the said judgment the dichotomy between the regular income tax profits and adjusted book profits u/s.115JA was clearly brought out. The Tribunal in the said judgment had rightly held that in section 115JA relief had to be computed u/s.80HHC(3)/3(A).

According to the Tribunal, once law itself declared that the adjusted book profit was amendable for further deductions on specified grounds, in a case where section 80HHC (80HHE in the present case) was operational, it became clear that computation for the deduction under those sections needed to be worked out on the basis of the adjusted book profit. The Supreme Court noted that in the present case it was concerned with section 80HHE which was referred to in the Explanation to section 115JA, Clause (ix).

According to the Supreme Court, the judgment of the Special Bench of the Tribunal in Syncome Formulations (supra) squarely applied to the present case. Following the view taken by the Special Bench in Syncome Formulations (supra), the Tribunal in the present case had come to the conclusion that deduction claimed by the assessee u/s.80 HHE had to be worked out on the basis of adjusted book profit u/s.115JA and not on the basis of the profits computed under regular provisions of law applicable to computation of profits and gains of business. According to the Supreme Court there was no reason to interfere with the impugned judgment. The Supreme Court agreed with the view taken by the Special Bench of the Tribunal in the case of Syncome Formulations (supra). The Supreme Court dismissed the special leave filed by the Department. Note: In the above context, reference may also be made to the judgment of the Apex Court in the case of Ajanta Pharma Ltd., which has been analysed by us in the column ‘Closements’ in November, 2010 issue of the Journal.

The assessee, engaged in providing multidisciplinary management consultancy services having a worldwide reputation, filed its return of income for the assessment year 2000-01 on 30-11-2000 accompanied by tax audit report u/s. 44AB of the Act. In column 17(i) of the Form No.3CB, it was stated that the provision for payment of gratuity of Rs.23,70,306/- debited to the Profit & Loss Account was not allowable u/s 40A(7). Even though the statement indicated that the provision towards payment of gratuity was not allowable, the assessee inadvertently claimed a deduction thereon in its return of income. On the basis of return, the assessment order was passed u/s.143 (3) on 26-3-2003 allowing the aforesaid deduction.

A notice u/s. 148 of the Act was issued on 22-1-2004 reopening the assessment for the assessment year 2000-01 for disallowing the provision of gratuity of Rs.23,70,306/- u/s. 40A(7). The reason recorded for reopening the assessment was communicated to the assessee on 16-12-2004.

Soon after the assessee was communicated the reasons for reopening the assessment, it realised that a mistake had been committed and accordingly by a letter dated 20-1-2005, it informed the Assessing Officer that there was no willful suppression of facts by the assessee, but that a genuine mistake or omission had been committed. The assessee filed a revised return on the same day. The assessment order was passed on the same day and the assessee paid the taxes due, as well as the interest thereon.

The Assessing Officer however initiated penalty proceedings u/s. 271(1)(c), and after obtaining response from the assessee, levied penalty of Rs.23,37,689 being 300% on the tax sought to be evaded. The Commissioner of Income Tax (Appeals) upheld the penalty imposed on the assessee. The Tribunal upheld the imposition observing that though the mistake could be described as silly it could be not be expected from the assessee which was a high calibre and competent organisation. However, the Tribunal reduced the penalty to 100%. The High Court dismissed the appeal of the assessee.

The Supreme Court allowed the appeal, observing that the assessee was undoubtedly a reputed firm and had great expertise available with it. Notwithstanding this, it was possible that even the assessee could make a “silly” mistake and this was acknowledged both by the Tribunal as well as by the High Court. The fact that the tax audit report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable u/s. 40A(7) of the Act, indicated that the assessee made a computation error in its return of income. Apart from the fact that the assessee did not notice the error, it was not noticed even by the Assessing Officer who framed the assessment order. In that sense, even the Assessing Officer had made a mistake in overlooking the contents of the tax audit report. According to the Supreme Court, the contents of the tax audit report suggested that there was no question of the assessee concealing its income. There was also no question of the assessee furnishing any inaccurate particulars. In the opinion of the Supreme Court through a bona fide and inadvertent error, the assessee while submitting its return, failed to add the provision for gratuity to its total income. This could only be described as a human error, which everyone is prone to make. The calibre and expertise of the assessee had little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present one, did not mean that the assessee was guilty of either furnishing inaccurate particulars or had attempted to conceal its income.

According to the Supreme Court, the assessee had committed an inadvertent and bona fide error and had not intended to or attempted to either conceal its income or furnish inaccurate particulars.

Living Media India Ltd., a company incorporated under the Companies Act, 1956, publishes the magazines Reader’s Digest and India Today. These magazines are registered newspapers, vide Registration Nos. DL 11077/03-05 and DL 11021/01-05 respectively issued by the Department of Posts, Office of the Chief Post-Master General, Delhi Circle, New Delhi (in short “the Postal Department”) under the provisions of the Indian Post Office Act, 1898 (in short “the Act”), read with the Indian Post Office Rules, 1933 (in short “the Rules”), and the Post Office Guide and are entitled for transmission by post under concessional rate of postage.

On 14th October, 2005, the manager (circulation), Living Media India Ltd., submitted an application to the Postal Department seeking permission to post December, 2005, issue of Reader’s Digest magazine containing the advertisement of Toyota Motor Corporation in the form of booklet with calendar for the year 2006 at concessional rates in New Delhi. By letter dated 8th November, 2005, the Postal Department denied the grant of permission for mailing the said issue at concessional rates on the ground that the booklet containing advertisement with calendar is neither a supplement nor a part and parcel of the publication. On 17th November, 2005, the Director (Publishing), Living Media India once again submitted an application seeking the same permission which was also denied by the Postal Department by letter dated 21st November, 2005.

In the same way, the Postal Department also refused to grant concessional rate of postage to post the issue dated 26th December, 2005, of India Today magazine containing a booklet of Amway India Enterprises titled “Amway”, vide their letter dated 18th February, 2006, and 17th March, 2006, stating that the said magazine was also not entitled to avail of the benefit of concessional rate available to registered newspapers.

Living Media India Ltd., being aggrieved by the decision of the Postal Department filed a Writ Petitions before the High Court. The learned single judge of the High Court, by order dated 28th March, 2007, allowed both the petitions filed by Living Media India Ltd.

Being aggrieved, the Postal Department filed LPA’s before the High Court. The Division Bench of the High Court, vide common final judgment and order dated 11th September, 2009, while upholding the judgment of the learned single judge, dismissed both the appeals.

Challenging the said order, the Postal Department preferred appeals by way of special leave before the Supreme Court. There was a delay of 427 days in filing the above appeals.

The learned senior counsel for Living Media India Ltd., seriously objected to the conduct of the appellants in approaching the Supreme Court after the enormous and inordinate delay of 427 days in filing the above appeals.

The Supreme Court, after noting the various judgments cited by both the parties and the affidavits filed by the Postal Department dismissed the applications, holding that the Postal Department had itself mentioned and was aware of the date of the judgment of the Division Bench of the High Court as 11th September, 2009. Even according to the department, their counsel had applied for the certified copy of the said judgment only on 8th January, 2010, and the same was received by the department on the very same day. There was no explanation for not applying for certified copy of the impugned judgment on 11th September, 2009, or at least within a reasonable time. The fact remained that the certified copy was applied only on 8th January, 2010, i.e., after a period of nearly four months. In spite of affording another opportunity to file better affidavit by placing adequate material, neither the Department nor the person in-charge had filed any explanation for not applying the certified copy within the prescribed period. The other dates mentioned in the affidavit clearly showed that there was delay at every stage and there was no explanation to why such delay had occurred. The Supreme Court observed that, though it was stated by the Department that the delay was due to unavoidable circumstances and genuine difficulties, the fact remained that from day one, the Department or the person/persons concerned had not evinced diligence in prosecuting the matter to the court by taking appropriate steps. The person(s) concerned were well aware or conversant with the issues involved including the prescribed period of limitation for taking up the matter by way of filing a special leave petition in the court. The Postal Department cannot claim that they have separate period of limitation when the Department was possessed with competent persons familiar with court proceedings. According to the Supreme Court in the absence of plausible and acceptable explanation, the delay could not to be condoned mechanically merely because the Government or a wing of the Government was a party before it. The Supreme Court held that though it was conscious of the fact that in a matter of condonation of delay when there was no negligence or deliberate inaction or lack of bona fide, a liberal concession had to be adopted to advance substantial justice, but in the facts and circumstances, the Department could not be allowed to take advantage of various earlier decisions. The claim on account of impersonal machinery and inherited bureaucratic methodology of making several notes could not be accepted in view of the modern technologies being used and available. According to the Supreme Court, the law of limitation undoubtedly binds everybody including the Government.

In the opinion of the Supreme Court, unless all the Government bodies, their agent and instrumentalities have reasonable and acceptable explanation for the delay and there was bona fide effort, there is no need to accept the usual explanation that the file was kept pending for several months/ years due to considerable degree of procedural red-tape in the process. The Government departments are under a special obligation to ensure that they perform their duties with diligence and commitment. Condonation of delay is an exception and should not be used as an anticipated benefit for Government departments. The law shelters everyone under the same light and should not be swirled for the benefit of a few.

According to the Supreme Court, there was no proper explanation offered by the Department for the delay except mentioning of various dates; the Department had miserably failed to give any acceptable and cogent reasons sufficient to condone such a huge delay. The Supreme Court dismissed the appeals on the ground of delay.

The assessee, a manufacturer of mining equipments, entered into an agreement with an American company on 7th June, 1990. The agreement with the American company was called “licence and technical assistance agreement” under which the American company was required to transfer technical know-how to the assessee for consideration of $ 25,000 to be paid in three instalments. The first instalment in convertible Indian currency amounting to Rs.17,49,889 was paid on 29th November, 1990. Subsequently, disputes arose between the contracting parties and the know-how was not transferred by the American company.

The short question which arose for determination before the Supreme Court was, whether the amount of Rs.17,49,889 could be claimed by the assessee as a deduction u/s. 37 of the Income-tax Act, 1961.

The claim of the assessee u/s. 37 of the Income Tax Act, 1961 was rejected by the Department. However, the Department allowed the expenditure to be amortised u/s. 35AB of the Act.

The contention of the assessee was that section 35AB of the Act was not applicable to this case. The Supreme Court found no merit in the said contention.

The Supreme Court observed that s/s. (1) of section 35AB of the Act clearly states that, where the assessee has paid in any previous year any lump sum consideration for acquiring any knowhow for use for the purpose of his business, then one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. The Explanation to the said section says that the word “know-how” means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine. According to the Supreme Court if one carefully analyses section 35AB of the Act, it would be clear that prior to 1st April, 1986, there was some doubt as to whether such expenditure could fall u/s. 37 of the Act. To remove that doubt, section 35AB of the Act stood inserted. In s/s. (1) of section 35AB of the Act, there is a concept of amortisation of expenditure. The Supreme Court observed that in the present case, it was true that on account of certain disputes which arose between the parties, the balance amount was not paid by the assessee to the American company. However, the word “for” in section 35AB of the Act, which is a preposition in English grammar, has to be emphasised while interpreting section 35AB of the Act. Section 35AB of the Act says that the expenditure should have been incurred for the purposes of the business of the assessee. In the present case, the technical assistance agreement was entered into between the assessee and the American company for acquiring know-how which was, in turn, to be used in the business of the assessee. Once section 35AB of the Act comes into play, then section 37 of the Act has no application.

According to the Supreme Cour,t there was no error in the impugned judgment of the High Court. The Supreme Court dismissed the civil appeal filed by the assessee.

The assessee, a private limited company, carried on the business of manufacture and sale of television sets. For the assessment year 1987-88, the Assessing Officer while completing the assessment u/s. 143(3) found that the assessee had not included in the closing stock the element of excise duty. Accordingly, he added a sum of Rs.16,39,000 to the income of the assessee on the ground of undervaluation of closing stock.

The question before the Supreme Court was whether the Department was right in alleging that the closing stock was undervalued to the extent of Rs.16,39,000/-.

The Supreme Court noted that, it was not in dispute that the assessee had been following consistently the method of valuation of closing stock which was “cost or market price, whichever is lower.” Moreover, the Assessing Officer had conceded before the Commissioner of Income Tax (Appeals) that he revalued the closing stock without making any adjustment to the opening stock. According to the Supreme Court though u/s. 3 of the Central Excise Act, 1944, the levy of excise duty in on the manufacture of the finished product, the same is quantified and collected on the value (i.e. selling price). The Supreme Court referred to the judgment in the case of Chainrup Sampatram v. CIT reported in [1953] 24 ITR 481 (SC) in which it has been held that, “valuation of unsold stock at the close of the accounting period was a necessary part of the process of determining the trading results of that period. It cannot be regarded as source of profits. That the true purpose of crediting the value of unsold stock is to balance the cost of the goods entered on the other side of the account at the time of the purchase, so that on canceling out the entries relating to the same stock from both sides of the account, would leave only the transactions in which actual sales in the course of the year has taken place and thereby showing the profit or loss actually realised on the year’s trading. The entry for stock which appears in the trading account is intended to cancel the charge for the goods bought which have remained unsold which should represent the cost of the good”.

The Supreme Court for the above reasons, held that, the addition of Rs.16,39,000 to the income of the assessee on the ground of undervaluation of the closing stock was wrong.

Krishi Utpadan Mandi Samiti, a market committee incorporated and registered u/s. 12 of the Uttar Pradesh Krishi Utpadan Mandi Adhiniyam, 1964 (“the 1964 Adhiniyam” for short), carried out its activities in accordance with section 16 of the 1964 Adhiniyam, under which it is required to provided facilities for sale and purchase of specified agricultural produce in the market area. The members of the said market committee consisted of producers, brokers, agriculturists, traders, commission agents and arhatiyas. The source of income of the assessee was in the form of receipt collected as market fee from buyers and their agents, development cess on sale and purchase of agricultural products and licence fees from traders. U/s. 17(iv), the Mandi Samiti has to utilise the market committee fund the purpose of the 1964 Adhiniyam.

Under the 1964 Adhiniyam, broadly there are two distinct entities or bodies. One is Mandi Samiti (assessee) and the other is Mandi Parishad.

Section 26A of the 1964 Adhiniyam deals with establishment of the Mandi Parishad (Board). Under the 1964 Adhiniyam, the Board shall be a body corporate. Section 26A, inter alia, states that the Mandi Parishad (Board) shall have its own fund which shall be deemed to be a local fund and in which shall be credited all monies received by or on behalf of the Board, except monies required to be credited in the State Marketing Development Fund u/s. 26PP. U/s. 26PP, the State Marketing Development Fund has been established for the Mandi Parishad (Board) in which amounts received from the market committee u/s. 19(5) shall be credited. Section 19(5), inter alia, states that every market committee shall, out of its total receipts realised as development cess, shall pay to the Mandi Parishad (Board) contribution at a specified rate. The said payment from the Market Committee (Mandi Samiti) shall be credited to the State Marketing Development Fund u/s. 26PP. The State Marketing Development Fund shall be utilised by the Mandi Parishad (Board) for purposes indicated u/s. 26PP(2). Section 26PPP deals with establishment of Central Mandi Fund to which amounts specified in s/s. (1) shall be credited. Section 26PPP(2), inter alia, states that the Central Mandi Fund shall be utilised by the Mandi Parishad (Board) for rendering assistance to financially weak and underdeveloped market committees; that the funds would be used for construction, maintenance and repairs of link roads, market yards and other development works in the market area and such other purposes as may be directed by the State Government or the board.

The short question that arose before the Supreme Court was, whether transfer of amounts collected by Mandi Samiti to Mandi Parishad would constitute application of income for charitable purposes.

The Supreme Court noted that, both the Mandi Samiti and the Mandi Parishad were duly registered u/s. 12AA of the Income-tax Act, 1961 (“the 1961 Act”, for short). That, after the amendment of section 10(20) and section 10(29) by the Finance (No.2) 2 of 2002 with effect from 1st April, 2003, the words “local authority” had lost its restricted meaning and, therefore, the assessee (market committee) had to satisfy the conditions of section 12AA read with section 11(1)(a) of the 1961 Act, like any other body or person.

According to the learned senior counsel for the Department, in view of the said amendment, vide the Finance (No.2) Act of 2002, the assessee had to show that, during the relevant assessment year, income had been derived from property held under trust and that the said income stood applied to charitable purposes. According to the learned counsel, if one analysed the scheme of the 1964 Adhiniyam, it would become clear that the amounts transferred by the assessee to the Mandi Parishad could not constitute application of income for charitable purposes within the meaning of section 11(1)(a) of the 1961 Act in view of the fact that the assessee (Mandi Samiti) was only a conduit which collected Mandi shulk (fees) whereas utilisation of the said Mandi shulk was not by the assessee but is made by another entity, i.e., Mandi Parishad whose accounts were not verifiable and, therefore, according to the Department, such income would not get the benefit of exemption u/s. 11(1)(a) of the 1961 Act.

The Supreme Court held that u/s. 19(2) of the 1964 Adhiniyam, all expenditure incurred by the assessee in carrying out the purposes of the 1964 Adhiniyam (which includes advancing credit facilities to farmers and agriculturists as also construction of development works in the market area) had to be defrayed out of the market committee fund and the surplus, if any, had to be invested in such manner as may be prescribed. This was one circumstance in the 1964 Act to indicate application of income. Similarly, u/s. 19B(2) of the 1964 Adhiniyam, the assessee was statutorily obliged to apply the market development fund for the purposes of development of the market area. U/s. 19B(3), the assessee was statutorily obliged to utilise the amounts lying to the credit in the market development fund for extending facilities to the agriculturists, producers and payers of market fees. The market development fund was also to be statutorily utilised for development of market yards. Similarly, all contributions received by the market committee (Mandi Samiti) from the members u/s. 19(5) were to be statutorily paid by the market committee (assessee) to the Uttar Pradesh State Marketing Development Fund. These provisions indicated application of income of the assesee to the statutory funds set up under the 1964 Adhiniyam. According to the Supreme Court, keeping in mind the statutory scheme of the 1964 Adhiniyam, whose object falls u/s. 2(15) of the 1961 Act, there was no doubt that the assessee satisfied the conditions of section 11(1)(a) of the 1961 Act. The income derived by the assessee (which was an institution registered u/s. 12AA of the 1961 Act) from its property had been applied for charitable purposes, which includes advancement of an object of general public utility.