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Category: Glimpses Of Supreme Court Rulings

Assessment – Limitation – Draft Assessment Order – Income Tax Authorities ¬– Even though an order is made u/s. 125A(1) empowering the Inspecting Assistant Commissioner (IAC) to perform the function of an Income Tax Officer, yet if he has not exercised the power or performed the function of Income-Tax Officer, the provisions requiring approval or sanction of the IAC would be applicable – Provisions of section 144B would not apply only if the Inspecting Assistant Commissioner exercises powers or performs the function of Income-tax Officer – In absence of actual exercise of powers the period during which the draft assessment order was forwarded to the IAC till the receiving of the instructions from IAC u/s. 144B is to be excluded in computing the period of limitation.

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CIT v. Saurasthra Cement and Chem. Industries Ltd. and Saraya Sugar Mills Pvt. Ltd. v. CIT (2016) 384 ITR 186 (SC)

In terms of section 153 of the Income-tax Act 1961 (hereinafter referred to as “the Act”), time limit for completion of the assessment to be made under section 143 or 144 of the Act is at any time before the expiry of two years from the end of the assessment year in which the income is first assessable, where assessment year is commencing on or after April 1, 1969.  On this reckoning, the date by which assessment should have been carried out by the Assessing Officer in respect of the assessment year 1981-82 was March 31, 1984.  The assessment order was, however, passed on September 1, 1984.  The Revenue claimed that this assessment order was still within the prescribed period of limitation because of the reason that on March 13, 1984 draft assessment  order was passed pertaining to the aforesaid assessment year and forwarded to the Inspecting Assistant Commissioner, Central Range-II, Ahmadabad  on March 13, 1984 (i.e., before March 31, 1984).  The Inspecting Assistant Commissioner issued instructions under section 144B of the Act on August 31, 1984 and based on that the Assessing Officer framed the assessment on September 1, 1984 under section 143(3) of the Act read with section 144B of the Act.

The Supreme Court noted that the position that was taken by the Revenue was that the period from March13, 1984 to August 31, 1984, when the matter was before the Inspecting Assistant Commissioner, had to be excluded while computing the period of limitation of two years and once the period is excluded the assessment order was passed within the period of limitation.
The contention of the responding-assessee, on the other hand, was that, by order dated August 29, 1983, the Commissioner of Income Tax, Central, Ahmedabad  passed under section 125A(1) of the Act had assigned all the powers and functions of the Income Tax Officer, Central Circle, Jamnagar to the Inspecting Assistant Commissioner.  This order was passed specifically in case of the respondent herein which became effective from September 1, 1983.  It was the submission that once, by virtue of the aforesaid order dated August 29, 1983, passed by the Commissioner of Income-tax, the Inspecting Assistant Commissioner is conferred concurrent jurisdiction, along with the Income-tax Office, empowering him to make assessment order in the case of the assessee, there was no question of  forwarding the draft assessment order by the Income-tax Officer to the Inspecting Assistant Commissioner and this unnecessary and superfluous exercise would not enure to the advantage of the Revenue giving it the benefit of the period from March 13, 1984 to August 31, 1984 while calculating the period of limitation of two years provided under section 153 of the Act.

The Supreme Court noted that the Income-tax Appellate Tribunal found force in the said submission of the assessee and allowed the appeal thereby setting aside the assessment order.  The Gujarat High Court,  upheld this view of the Income-tax Appellate Tribunal, resulting in the dismissal of the appeal of the Appellant.

The Supreme Court  also noted that in the appeal arising out of SLP(C) No.13766 of 2001 which was preferred by the assessee  M/s.  Saraya Sugar Mills Pvt. Ltd., in the same circumstances, on the same question, the Allahabad High Court has taken a contrary view.  The High Court of Allahabad has found merit in the stand taken by the Revenue and excluded the period during which the draft assessment was forwarded to the Inspecting Assistant Commissioner till the date of receiving the instructions from the Inspecting Assistant Commissioner under section 144B of the Act.

The Supreme Court thus, faced with two conflicting views and had  to decide as to which High Court had correctly decided the issue of limitation.

The Supreme Court noted that section 144B of the Act deals with a situation where the Income-tax Officer intends to pass an assessment order which is in variation to the income or loss that is shown in the return of the assessee and the amount of such variation exceeds the amount that can be fixed by the Board under sub-section (6) thereof. In such a situation, the Income-tax Officer is under obligation to first forward a draft of the proposed order of assessment to the assessee who can file his objections within 7 days thereof and if the objections are received, the Income-tax Officer is to forward the draft order together with objections to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner, after considering the draft order and the objections, is empowered to issue such direction as he thinks fit for the guidance of the Income-Tax Officer to complete the assessment.

The Supreme Court further noted from the reading of section 153, the period (not exceeding 180 days) commencing from the date on which the Income –tax Officer forwards the draft order under sub-section (1) of section 144B to the assessee and ending with the date on which the Income-tax Officer receives the directions from the Inspecting Assistant Commissioner under sub-section (a) of section 144B, is to be excluded while computing the period of limitation.

Before the Supreme Court, thrust   of the counsel for the assessee was on sub-section (4) of section 125A with the submission that on the conferment of the concurrent jurisdiction, provisions of the Act requiring approval and the sanction of the Inspecting Assistant Commissioner were not applicable and, therefore, the provisions of section 144B ceased to apply and should not have been invoked by the Income-tax Officer in the instant case. It was also argued that the High Court in the impugned judgment had rightly discussed that with the passing of a specific order dated August 29, 1983 by the Commissioner of Income-tax directing that all the powers and functions assigned to the Income-tax Officer, Central Circle, Jamnagar were thereby available to the Inspecting Assistant Commissioner, Central Range II, Ahmedabad, the Inspecting Assistant Commissioner,  Central Range II, Ahmedabad was brought at par with the Income-tax Officer, in so far as it pertains to the assessment of the assessee herein and he did not remain an Officer higher in status than the Income-tax Officer in so far as assessment of the assessee was concerned and for this reason also no such reference to the Inspecting Assistant Commissioner was called for.

According to the Supreme Court, these arguments were without any force and the result which the respondent-assessee wants did not flow from the reading of section 125A of the Act. The Supreme Court held that a bare reading of sub-section (4) of section 125A of the Act provides that where –

(a) An order is made under sub-section (1), and

(b) The Inspecting Assistant Commissioner exercises the powers or performs the functions of an Income-tax Officer in relation to any area, or persons or classes of persons, or incomes or classes of income, or cases or classes of cases –

(i) references in this Act or in any rule made there under to the Income-tax Officer shall be constructed as references to the Inspecting Assistant Commissioner, and

(ii) any provision of this Act requiring approval or sanction of the Inspecting Assistant Commissioner will not be applicable.

The Supreme Court held that, hence, the provision of the Act requiring the approval or sanction of the Inspecting Assistant Commissioner will not be applicable only in those cases where both the aforementioned conditions (a) and (b) are are satisfied.  It would mean that, even though an order is made under section 125A(1) empowering the Inspecting Assistant Commissioner to perform the functions of an Income-tax Officer, yet if he has not exercised the power or performed the function of an Income-tax Officer, the provisions requiring approval or sanction of the Inspecting Assistant Commissioner will be applicable.  Sub-section (4) nowhere provides that, if some directions by the Inspecting Assistant Commissioner are issued as provided under sub-section (2), the provisions requiring approval or sanction of the Inspecting Assistant Commissioner will not be applicable.

The Supreme Court, in the instant case, found that it was not the Inspecting Assistant Commissioner who exercised the powers or performed the functions of the Income-tax Officer, even when such a power was conferred upon him, concurrently with the Incom-tax Officer.  The significant feature of section 125A of the Act is that even when the Inspecting Assistant Commissioner is given the same powers and functions which are to be performed by the Income-tax Officer in relation to any area or classes or person or income or classes of income or cases or classes of cases, on the conferment of such powers, the Income Tax Officer does not stand denuded of those powers.  With conferment of such powers on the Inspecting Assistant Commissioner gives him “concurrent” jurisdiction which means that both, the Income-tax Officer as well as the Inspecting Assistant Commissioner, are empowered to exercise those functions including passing assessment order.  It is still open to the Income-tax Officer to assume the jurisdiction and pass the order in case the Inspecting Assistant Commissioner does not exercise those powers in respect of the assessment year.  Provisions of section 144B would not apply only if the Inspecting Assistant Commissioner exercises powers or performs the functions of Income-tax Officer.  What is important is the actual exercise of powers and not merely conferment of the powers that are borne out from the bare reading of sub-section (4) of section 125B.

According to the Supreme Court, the position would become abundantly clear when one reads section 144B, particularly, sub-section (7) thereof.

Sub-section (7), in no uncertain terms, mentions that section 144B will not apply in that case where the Inspecting Assistant Commissioner “exercises the powers or performs the functions of an Income-tax Officer” in pursuance of an order made under section 125 or section 125A.

The Supreme Court observed that in the instant case, as already noted above, no such power was exercised or function of an Income-tax Officer was performed by the Inspecting Assistant Commissioner.

The Supreme Court observed that the High Court of Gujarat while dismissing the appeal of the Revenue failed to take into account the earlier judgment of the Co-ordinate Bench of the High Court in CIT v. Shree Digvijay Woolllen Mills Ltd. [1995]  212 ITR 310 (Guj), which had taken the above  view. The Supreme Court agreed with the view taken in CIT v. Shree Digvijay Woolllen Mills Ltd. thereby allowed Civil Appeal No.2984 of 2008 and setting aside the impugned judgment of the Gujarat High Court.

For these reasons, the Civil Appeal arising out of SLP(C) No.13766 of 2011 filed by the assessee against the judgment of the Allahabad High Court was dismissed affirming the view in the said case.

Revision – Jurisdiction – Condition Precedent – Satisfaction that an order passed by the authority under the Act is erroneous and prejudicial to the interest of the Revenue – Once satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice – Unlike the power of reopening an assessment u/s. 147 of the Act, the power of revision u/s. 263 is not contingent on the giving of a notice to show cause.

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CIT v. Amitabh Bachchan [2016] 384 ITR 200 (SC)

For the assessment year 2001-02 the
assessment order was passed on March 30, 2004. 
After the assessment as above was finalized, a show-cause notice dated
November 7, 2005 under section 263 of the Act was issed by the learned
Commissioner of Income Tax detailing as many as eleven (11) issues/grounds on
which the assessment order was proposed to be revised under section 263 of the
Act.  The respondent-assessee filed his
reply to the said show-case notice on consideration of which by order dated
March 20, 2006 the learned Commissioner of Income Tax set aside the order  of assessment dated March 30, 2004 and
directed a fresh assessment to be made. 
Aggrieved, the respondent-assessee challenged the said order before the
learned Tribunal which was allowed by the order dated August 28, 2007.

Aggrieved
by the order dated August 28, 2007 of the learned Tribunal, the Revenue filed
an appeal under section 260A of the Act before the High Court  of Bombay. 
The aforesaid appeal, i.e. I.T.A. No.293 of 2008 was dismissed by the
High Court by the order dated August 7, 2008 holding that as the Commissioner
of Income Tax had gone beyond the scope of the show-cause notice dated
November7, 2005 and had dealt with the issues not covered/mentioned in the said
notice, the   revisional order dated March 20, 2006 was in
violation of the principles of natural justice. 
So far as the question as to whether the Assessing Officer had made
sufficient enquiries about the assessee’s claim of expenses made in the
re-revised return of income was concerned, which question was formulated as
question No.2 for the High Court’s consideration, the High Court took the view
that the said question raised pure questions of fact and, therefore, ought not
to be examined under section 260A of the Act. 
The appeal of the Revenue was consequently dismissed.  Aggrieved, appeal was filed before the Supreme
Court upon grant of leave under article 136 of the Constitution of India.

The
Supreme Court noted that the assessment in question was set aside by the  Commissioner of Income Tax by the order dated
March 20, 2006 on the principal ground that requisite and due enquires were not
made by the Assessing Officer prior to finalization of the assessment by order
dated March 30, 2004.  In this
connection, the   Commissioner of Income Tax on consideration of
the facts of the case and the record of the proceedings came to the conclusion
that in the course of the assessment proceedings despite several opportunities
the assessee did not submit the requisite books of account and documents and
deliberately dragged the matter leading to one adjournment after the  other. 
Eventually, the Assessing Officer, to avoid the bar of limitation, had
no option but to “hurriedly” finalise the assessment proceedings which on due
and proper scrutiny disclosed that the necessary enquires were not made.  On the said basis the Commissioner of Income
Tax came to the conclusion that the assessment order in question was erroneous
and prejudicial to the interests of the Revenue warranting exercise of power
under section 263 of the Act.  Consequently,
the assessment for the year 2001-02 was set aside and a fresh assessment was
ordered.  In the order dated March 20,
2006 the  Commissioner of Income Tax
arrived at findings and conclusions in respect of issues which were not
specifically mentioned in the show-cause notice dated November 7, 2005.  In fact, on as many as seven/eight (07/08)
issues mentioned in the said show-cause notice the   Commissioner of Income Tax did not record any
finding   whereas conclusions adverse to the assessee
were recorded on issues not specifically mentioned in the said notice before
proceeding to hold that the assessment needs to be set aside.  However, three (03) of the issues, were  common to the show-cause notice as well as the
revisional order of the learned Commissioner of Income Tax.

On
appeal, the   Tribunal took the view that the   Commissioner of Income Tax exercising powers
under section 263 of the Act could not have gone beyond the issues mentioned in
the show-cause notice dated November 7, 2005. 
The Tribunal, therefore, thought it proper to take the view that in
respect of the issues not mentioned in the show-cause notice the findings as
recorded in the revisional order dated March 20, 2006 have to be understood to
be in breach of the principles of natural justice.  The Tribunal also specifically considered the
three (03) common issues mentioned above and on such consideration arrived at
the conclusion that the reasons disclosed by the   Commissioner of Income Tax in the order dated March
20, 2006 for holding the assessment to be liable for cancellation on that basis
were not tenable.  Accordingly, the
Tribunal allowed the appeal of the assessee and reversed the order  of the suo motu revision dated March 20,
2006.

The
Supreme Court, in an appeal filed by the Revenue, observed that under the Act
different shades of power have been conferred on different authorities to deal
with orders of assessment passed by the primary authority.  While section 147 confers power on the
assessing authority itself to proceed against income escaping assessment, section
154 of the Act empowers such authority to correct a mistake apparent on the
face of the record.  The power of appeal
and revision is contained in Chapter XX of the Act  which includes section 263 that concern suo
motu power of revision on the   Commissioner of Income Tax.  The different shades of power conferred on
different authorities under the Act has to be exercised within the areas
specifically delineated by the Act and the exercise of power under one
provision cannot trench upon the powers available under another provision of
the Act.

The
Supreme Court reverting to the specific provisions of section 263 of the Act held
that what has to be seen is that a satisfaction that an order passed by the
authority under the Act is erroneous and prejudicial to the interests of the
Revenue is the basic pre-condition for exercise of jurisdiction under section
263 of the Act.  Both are twin conditions
that have to be conjointly present.  Once
such satisfaction is reached, jurisdiction to exercise the power would be
available subject to observance of the principles of natural justice which is
implicit in the requirement cast by the section to give the assessee an
opportunity of being heard.  It is in the
context of the above position that this court has repeatedly held that unlike
the power of reopening an assessment under section 147 of the Act, the power of
revision under section 263 is not contingent on the giving of a notice to show
cause.  In fact, section 263 has been
understood not to require any specific show-cause notice to be served on the
assessee.  Rather, what is required under
the said provision is an opportunity of hearing to the assessee.  The two requirements are different; the first
would comprehend a prior notice detailing the specific grounds on which
revision of the assessment order is tentatively being proposed.  Such a notice is not required.  What is contemplated by section 263, is an
opportunity of hearing to be afforded to the assessee.  Failure to give such an opportunity would
render the revisional order legally fragile not on the ground of lack of
jurisdiction but on the ground of violation of principles of natural justice.

It
may be that in a given case and in most cases it is so done a notice proposing
the revisional exercise is given to the assessee indicating therein broadly or
even specifically the grounds on which the exercise is felt necessary.  But there is nothing in the section  (section 263) to raise the said notice to the
status of a mandatory show-cause notice affecting the initiation of the
exercise in the absence thereof or to require the Commissioner of Income Tax to
confine himself to the terms of the notice and foreclosing consideration of any
other issue or question of fact.  This is
not the purport of section 263.  There
can be no dispute that while the Commissioner of Income Tax is free to exercise
his jurisdiction on consideration of all relevant facts, a full opportunity to
controvert the same and to explain the circumstances surrounding such facts,
as  may be considered relevant by the
assessee, must be afforded to him by the Commissioner of Income Tax prior to
the finalization of the decision.

The
Supreme Court held that in the present case, there was no dispute that in the
order dated March 20, 2006 passed by the   Commissioner of Income Tax under section 263
of the Act findings have been recorded on issues that are not specifically
mentioned in the show-cause notice dated November 7, 2005 though there are
three (03) issues mentioned in the show-cause notice dated 7, 2005 which had
specifically been dealt with in order dated March 20, 2006.  The Tribunal in its order dated August 28,
2007 put the aforesaid two features of the case into two different
compartments.  In so far as the first
question, i.e., findings contained in the order of the Commissioner of Income
Tax dated March 20, 2006 beyond the issues mentioned in the show-cause notice was
concerned, the Tribunal held that the revision order was bad in law and also
violative of principles of natural justice and thus not maintainable. 

According
to the Supreme Court, the above ground which had led the Tribunal to interfere
with the order of the Commissioner of Income Tax seemed to be contrary to the
settled position in law, as indicated above and the two decisions of the
Supreme Court in Gita Devi Aggarwal (76 ITR 496) and Electro House (82 ITR 824).  The   Tribunal in its order dated August 28, 2007
had not recorded any findings that in course of the suo motu revisional
proceedings, hearing of which was spread over many days and attended to by the
authorized representative of the assessee, opportunity of hearing was not
afforded to the assessee and that the assessee was denied an opportunity to
contest the facts on the basis of which the   Commissioner of Income Tax had come to his
conclusions as recorded in the order dated March 20, 2006.

The
Supreme Court observed that in the course of the revisional exercise relevant
facts, documents and books of account which were over looked in the assessment
proceedings were considered.  On such
re-scrutiny it was revealed that the original assessment order on several heads
was erroneous and had the potential of causing loss of revenue to the
State.  It is on the aforesaid basis that
the necessary satisfaction that the assessment order dated March 30, 2004 was
erroneous and prejudicial to the interests of the Revenue was recorded by the
Commissioner of Income Tax.  At each
stage of the revisional proceedings, the authorized representative of the
assessee had appeared and had full opportunity to contest the basis on which
the revisional authority was proceeding/ had proceeded in the matter.  The Supreme Court held that if the revisional
authority had come to its conclusions in the matter on the basis of the record
of the assessment proceedings which was open for scrutiny by the assessee and
available to his authorized representative at all times, it was difficult to
see as to how the requirement of giving of reasonable opportunity of being
heard as contemplated by section 263 of the Act had been breached in the
present case.  The order of the   Tribunal in so far as the first issue i.e. the
revisional order going beyond the show-cause notice was concerned, therefore,  could not  accepted.

The
Supreme Court therefore considered the second limb of the case as dealt with by
the Tribunal, namely, that tenability of the order of the Commissioner of
Income Tax on the three (03) issues mentioned in the show-cause notice and also
dealt with in the revisional order dated March 20, 2006.  The aforesaid three (03) issues were:

         (i)  The
assessee maintaining 5 bank accounts and the Assessing Officer not examining
the 5th bank account, books of account and any other bank account
where receipts related to KBC were banked.

       (ii) Regarding
claim of deposit of Rs.5206 lakh in Bank the a/c No. 11155 under the head
“Receipt on behalf of Mrs. Jaya Bachchan, and  

        (iii)  Regarding
the claim of additional expenses in the re-revised return. 

On the
above issues, the   Tribunal had given detailed reasons for not
accepting the grounds cited in the revisional order for setting aside the
assessment under section 263 of the Act. 
According to the Supreme Court, the reasons cited by the   Tribunal in so far as the first two issues
were  concerned may not justify a serious
relook and hence not be gone into.  The Supreme
Court however was of the opinion the third question would, however, require
some detailed attention.  The said
question was with regard to the claim of additional expenses made by the
assessee in its re-revised return which was subsequently withdrawn. 


The Supreme Court held
that there could  be no doubt that so
long as the view taken by the Assessing officer is a possible view, the same
ought not to be interfered with by the Commissioner of Income Tax under section
263 of the Act merelyon the ground that there is another possible view of the
matter.  Permitting exercise of
revisional power in a situation where two views are possible would really
amount of conferring some kind of an appellate power in the revisional
authority.  This is a course of action
that must be desisted from.  However, according
to the Supreme Court the above was not the situation in the present case in
view of the reasons stated by the Commissioner of Income Tax on the basis of
which the said authority felt that the matter needed further investigation, a
view with which the Supreme Court wholly agreed.  Making a claim which would prima facie
disclose that the expenses in respect of which deduction had been claimed had
been incurred and thereafter abandoning/withdrawing the same gave rise to the
necessity of further enquiry in the interests of the Revenue.  The notice issued under section 69C of the
Act could not have been simply dropped on the ground that the claim had been
withdrawn.  The Supreme Court, therefore,
was of the opinion that the   Commissioner of Income Tax was perfectly
justified in coming to his conclusions in so far as the issue No. (iii) was
concerned and in passing the impugned order on that basis.  The Tribunal as well as the High Court, therefore,
ought not to have interfered with the said conclusion.

The Supreme Court concluded that the present was a fit case for
exercise of the suo motu revisional powers of the   Commissioner of Income Tax under section 263
of the Act.

Deduction of tax at source- The contract of employment not being the proximate cause for the receipt of tips by the employee from a customer, the same would be outside the dragnet of sections 15 and 17 of the Income-tax Act and hence outside section 192.

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ITC Ltd. vs. CIT. (2016) 384 ITR 14 (SC) The assessees are engaged in the business of owning, operating, and managing hotels. Surveys conducted at the business premises of the assesses allegedly revealed that the assessees had been paying tips to its employees but not deducting taxes thereon. The Assessing Officer treated the receipt of the tips as income under the head “Salary” in the hands of the various employees and held that the assessees were liable to deduct tax at source from such payment u/s. 192 of the Income tax Act, 1961. The assessees were treated by the Assessing Officer as assessees-in-default under section 201(1) of the Act. The Assessing Officers in various assessment orders worked out the different amounts of tax to be paid by all the aforesaid assessees u/s. 201(1), as also interest u/s. 201(1A) of the said Act for the assessment years 2003-04, 2004-05 and 2005-06.

The Commissioner of Income –tax (Appeals) vide his common order dated November 28, 2008 allowed the various appeals of the assessees holding that the assessees could not be treated as assesses-in-default u/s. 201(1) of the Act for non-deduction of tax on tips collected by them and distributed to their employees. Appeals filed by the Revenue to the Income-tax Appellate Tribunal came to be dismissed by the Tribunal by relying upon its own order for the assessment year 1986-87 in the case of ITC and the case of Nehru Palace Hotels Limited. Against the said orders of the Tribunal, appeals were preferred by the Revenue to the High Court.

The High Court held, after considering sections 15, 17 and 192 of the Income-Tax Act, that tips would amount to “ profit in addition to salary or wages” and would fall u/s. 15(b) read with section 17(1)(iv) and 17(3)(ii). Even so, the High Court held that when tips are received by employee directly in cash, the employer has no role to play and would therefore be outside the purview of section 192 of the Act. However, the moment a tip is included and paid by way of a credit card by a customer, since such tip goes into the account of the employer after which it is distributed to the employees, the receipt of such money from the employer would, according to the High Court, amount to “salary” within the extended definition contained in section 17 of the Act. The High Court concluded that the receipt of the tips constituted income at the hands of the recipients and were chargeable to the income-tax under the head “Salary” u/s. 15 of the Act. That being so it was obligatory upon the assessees to deduct taxes at source from such payment u/s. 192 of the Act.

Further, since the assessees were declared to be assessees-in-default u/s. 201 of the Act, the High Court found that despite the fact that the assessees did not deduct the said amount based on a bone fide belief and no dishonest intention could be attributed to any of them, yet the High Court held that levy of interest u/s. 201(1A) would follow, as the payment of simple interest under the said provision was mandatory.

The Supreme Court, on appeal by the assessees, observed that on the facts of the present case, it was clear that there was no vested right in the employee to claim any amount of tips from his employers. Tips being purely voluntary amounts that may or may or may not be paid by customers for services rendered to them would not, therefore, fall within section 15(b) at all. Also, it was clear that salary must be paid or allowed to an employee in the previous year “by or on behalf of” an employer. Even assuming that the expression “allowed” is an expression of width, the salary must be paid by or on behalf of an employer. Section 15(b) necessarily has reference to the contract of employment between employer and employee, and salary paid or allowed must therefore have reference to such contract of employment. On the facts of the present case, it was clear that the amount of tips paid by the employer to the employees had no reference to the contract of employment at all. Tips were received by the employer in a fiduciary capacity as trustee for payment that were received from customer. There was, therefore, no reference to the contract of employment when these amount were paid by the employer to the employee.

The Supreme Court noted that it was nobody’s case that the amount of tips received by the employees in the present cases were not taxable in their hands. The learned counsel for the assessees had stated that they were so taxable as income from other sources. The question that it had to determine was therefore somewhat different, namely whether the person responsible for paying salary income to his employee is liable to deduct the tax of the employee and pay it over on an estimated basis u/s. 192 of the Income-tax Act.

The Supreme Court held that contract of employment in the present cases, not being the proximate cause for the receipt of tips by the employee from a customer, the same would be outside the dragnet of sections 15 and 17 of the Income-tax Act.

The Supreme court further held that interest u/s. 201(1A) could only be levied when a person is declared as an assessee-in-default. Having found that the appellants in the present cases were outside section 192 of the Act, the appellant could not be stated to be assessees-in-default and hence no question of interest therefore arose.

University – Exemption – Conditions Precedent – University must exist solely for education and must be wholly or substantially financed by Government

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Visvesvraya Technological University vs. ACIT (2016) 384 ITR 37 (SC)

The appellant University, namely, Visvesvaraya Technological University (VTU) had been constituted under the Visvesvaraya Technological University Act, 1994. It discharged functions earlier performed by the Department of Technical Education, Government of Karnataka. The University exercised control over all Government and Private Engineering Colleges within Karnataka.

For the assessment year 2004-05 to 2009-10 notices u/s. 148 of the Income-tax Act, 1961 were issued to the appellant-University assessee. Eventually returns were filed for the assessment years in question declaring “nil” income and claiming exemption u/s. 10(23C)(iiiab) of the Act. The aforesaid claim of exemption was negated by the Assessing Officer who proceeded to make the assessments. The same view has been by all the authorities under the Act and also by the High Court.

The question, therefore, that arose before the Supreme Court in the present appeals was the entitlement of the appellant-University-assessee to exemption from payment of tax under the provisions of section 10(23C) (iiiab) of the Act.

The Supreme Court observed that the entitlement for exemption u/s. 10(23C)(iiiab) was subject to two conditions. Firstly the educational institution or the university must be solely for the purpose of education and without any profit motive. Secondly, it must be wholly or substantially financed by the Government. Both conditions would have to be satisfied before exemption could be granted under the aforesaid provision of the Act.

The Supreme Court noted that the relevant principles of law which governed the first issue, i.e., whether an educational institution or a university, as may be, exists only for educational purpose and not for profit was no longer res integra and was decided by it in Queen’s Educational Society vs. CIT(372 ITR 699).

The Supreme Court, in the present case, found that during a short period of a decade, i.e., from the year 1999 to 2010 the appellant University had generated a surplus of about Rs.500 crore. There was no doubt that the huge surplus had been collected/accumulated by realising fees under different heads in consonance with the powers vested in the University u/s. 23 of the VTU Act. The difference between the fees collected and the actual expenditure incurred for the purposes for which fees were collected is significant. In fact the expenditure incurred represented only a minuscule part of the fees collected. No remission, rebate or concession in the amount of fees charged under the different heads for the next academic year(s) had been granted to the students.

As against the above, the amount of direct grant from the Government has been meagre. The University nevertheless had grown and the number of private engineering colleges affiliated to it had increased from about 64 to presently about 194. The infrastructure of the University has also increased offering educational avenues to an increasing number of students in different and varied subjects.

Between 1994 and 2009 the University had actually spent about Rs.504 crore on infrastructure and the available surplus in the year 2010 which was in the range of Rs. 440 crore was also intended to be applied for different infrastructural work.

Even in a situation where direct Government grants had not been forthcoming and allocation against permissible heads like salary, etc. had not been made the University had thrived and prospered. There could, however, be no manner of doubt that the surplus accumulated over the years had been ploughed back for educational purpose. In such a situation, following the principles laid down in Queen’s Educational Society (supra), the Supreme Court  held that the first requirement of section 10(23C)(iiiab), namely, that the appellant University existed “solely for educational purposes and not for purposes of profits” was satisfied.

As to the further question as to whether the appellant University was wholly or substantially financed by the Government which was an additional requirement for claiming benefit u/s. 10(23C)(iiiab) of the Act, it was not in dispute that grants/direct financing by the Governtment during the six (06) assessment years in question, i.e., 2004-05 to 2009-10 had never exceeded 1 per cent of the total receipts of the appellantuniversity assessee.

The argument advanced before the Supreme Court by the University that fees of all kinds collected within the four corners of the provisions of section 23 of the VTU Act must be taken to be receipts from sources of finance provided by the Government. The rates of such fees are fixed by the Fee Committee of the University or by authorized Government Agencies (in case of Common Entrance Test). It was , therefore, contended that such receipts must be understood to be funds made available by the Government as contemplated by the provisions of section 10(23C)(iiiab) of the Act.

The Supreme Court held that receipts by way of fee collection of different kinds continued to be a major source of income for all universities including private universities. Levy and collection of fees was invariably an exercise under the provisions of the statute constituting the University. In such a situation, if collection of fees was to be understood to be amounting to funding by the Government merely because collection of such fees was empowered by the statue, all such receipts by way of fees may become eligible to claim exemption u/s. 10(23C) (iiiab). Such a result would virtually render the provisions of the other two sub-sections, namely, 10(23c)(iiiad) and 10(23c)(vi) nugatory and could not be understood to have been intended by the Legislature and must, therefore, be avoided.

According to the Supreme Court, it would therefore, be more appropriate to hold that funds received from the Government contemplated u/s. 10(23C)(iiiab) of the Act must be direct grants/contributions from government sources and not fees collected under the statute.

Before the Supreme Court , reliance had been placed on the judgment of the High Court of Karnataka in CIT vs. Indian Institute of Management [370 ITR 81], particularly, the view expressed that the expression “wholly or substantially financed by the Government” as appearing in section 10(23C) could not be confined to annual grants and must include the value of the land made available by the Government. The Supreme Court noted that in the present case, the High Court in paragraph 53 of the impugned judgment has recorded that even if the value of the land allotted to the University (114 acres) was taken into account the total funding of the University by the Government would be around 4 per cent to 5 per cent of its total receipt. That apart what was held by the High Court in the above case, while repelling the contention of the Revenue that the exemption u/s. 10(23C)(iiiab) of the Act for a particular assessment year must be judged in the context of receipt of annual grants from the Government in that particular year, is that apart from annual grants the value of the land made available; the investment by the Government in the buildings and other infrastructure and the expenses incurred in running the institution must all be taken together while deciding whether the institution is wholly or substantially financed by the Government. The Supreme Court held that situation before it, on facts, was different leading to the irresistible conclusion that the appellant university did not satisfy the second requirement spelt out by section 10(23C)(iiiab) of the Act. The appellants University was neither directly nor even substantially financed by the Government so as to be entitled to exemption from payment of tax under the Act.

The Supreme Court for the aforesaid reasons dismissed the appeals.

Wealth Tax – Asset – Definition – Urban Land – Exclusions –Land occupied by any building which has been constructed with the approval of the appropriate authority would not include land occupied by any building which is still under construction.

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Girdhar G. Yadalam vs. CWT (2016) 384 ITR 52 (SC)

The assessee, a Hindu undivided family which was the coowner of a land measuring 30,663.04 sq. metres, situated at survey No.67/2, 67/3, 67/4 and 67/5 of Adugodi Village and a portion of survey No.151 of Kornamangala Village of Begur Hobli of Bangalore South Taluq, Bangalore District, bearing City Survey No.CTS/2. The assessee entered into various development agreements with one M/s. Prestige Estates Properties Private Ltd. for construction of residential flats. The assessee claimed that it had retained ownership of the land until flats are fully constructed and possession of the assessee’s share was handed over to it. The development agreement constituted only permissive possession according to the assessee for the limited purpose of construction of flats. The assessee contended that the assessee continued to be the owner of the land for the financial years 1995-96 and subsequent years till the sale of flats. Notice u/s. 17 of the Act was issued to the assessee and he filed return of wealth of Rs.8,48,000 on August 20, 2003. After considering the contention to not to treat the property as urban land, the Assessing Officer brought it to tax under an order dated March 31, 2005. An appeal was filed before the Assistant Commissioner of Income Tax (Appeals), Bangalore. The appeal stood allowed in the light of an earlier order of the Tribunal. The Revenue thereafter filed an appeal to the Tribunal. The Tribunal following its earlier decision dismissed the appeal filed by the Revenue. The Revenue took up the matter in further appeals before the High Court of Karnataka. The High Court upset the order of the Income-tax Appellate Tribunal holding that the assessee was not entitled to the benefit of clause (ii) of Explanation 1(b) to section 2 (ea)(v) of the Act, as the building had not been constructed and was still under construction during the assessment year.

The Supreme Court at the outset noted that in the present case it was concerned with the interpretation that is to be accorded to the provisions of Explanation 1(b) to section 2(ea)(v) of the Wealth-tax Act, 1957. This Explanation defines “urban land”.

The Supreme Court observed that it was not in dispute that “urban land” is to be included to calculate “net wealth” for the purpose of wealth tax under the Act. However, certain lands are not to be treated as “urban land” which are mentioned in Explanation 1(b). But section 2(ea) of the Act was inserted by the Finance Act 1992 (Act No.18 of 1992), with effect from April 1, 1993. The purpose was to exempt some of the lands from wealth-tax with the objective of stimulating investment in productive assets. It is in that context that the land occupied by any building which has been constructed with the approval of the appropriate authority is excluded from the definition of urban land. On a plain reading of the said clause it becomes clear that in order to avail of the benefit, the following conditions have to be satisfied:

(a) The land is occupied by any building;
(b) Such a building has been constructed;
(c) The construction is done with the approval of the appropriate authority.

The Supreme Court noted that notwithstanding the aforesaid plain language; an endeavour of the Counsel for the assessee was to impress upon the Court to read the said clause to include even that land where the construction of building activity has been started. He, thus, wanted that the words “has been constructed” is to be read as “is being constructed”.

The Supreme Court held that on the plain language of the provision in question, the benefit of the said clause would be applicable only in respect of the building “which has been constructed”. The expression “has been constructed” obviously cannot include within its sweep a building which is not fully constructed or in the process of construction. The opening words of clause (ii) also become important in this behalf, where it is stated that “the land occupied by any building”. The land cannot be treated to be occupied by a building where it is still under construction.

No doubt, the purpose and objective of introducing section 2(ea) in the Act was to stimulate productive assets. However, the event when such a provision is to be attracted is also mentioned in Explanation 1(b) itself carving out those situations when the land is not to be treated urban land. The Legislature in its wisdom conferred the benefit of exemption in respect of urban vacant land only when the building is fully constructed and not when the construction activity has merely started.

Shipping Companies – Computation of income – Tonnage Tax Scheme – Income generated from slot charter could be computed in accordance with the provisions of Chapter-XII-G and requirement of producing certificate referred to in section 115 VX would not apply.

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CIT vs. Trans Asian Shipping Services (P) Ltd. (2016) 385
ITR 637 (SC)

The  question that arose before the Supreme Court
for consideration pertained to “slot charter”, i.e. should the “slot charter”
operations of “tonnage tax company” be carried on only in “qualifying ships” to
include the income from such operations to determine the “tonnage income” under
“tonnage tax scheme” in terms of the provisions of Chapter XII-G of the act? in
other words, is the income derived from “slot charter” operations of a “tonnage
tax company” liable to be excluded while determining the “tonnage income”
under  the  “tonnage 
tax  scheme”  if such operations are carried on in ships
which are not “qualifying ships” in terms of the provisions of that Chapter of
the act and the relevant provisions of the income-tax rules, 1962?

The
Supreme Court noted the tonnage tax Scheme, namely, Chapter XII-G of the
income-tax act, 1961 (the “act”) which contains special provisions for assessments
relating to income of shipping companies. under this Chapter, shipping
companies are  given  a 
choice  to either get income from
the shipping business computed in accordance with the provisions contained in
the act meant for computation of income in respect of business or profession or
opt for methodology of computing income as per the special formula provided in
that Chapter which accords a different treatment and different manner of
computation of income for the shipping business.

U/s.115VA
option is given to  the  shipping 
company, which is operating “qualifying ships”, as defined in certain
115 VD,  to get its income computed in
accordance with the provisions of Chapter XII-G, irrespective of those
stipulations otherwise contained in sections 28 to 43C for computation of
business income. once such an option is exercised and income is computed in
accordance with the provisions of the said Chapter, a fiction is created by
deeming the said income to be the profits and gains of such business chargeable
to tax under the head “Profits and gains of business or profession”.

For
a shipping company to be eligible to exercise such an option, there are certain
conditions to be fulfilled, which are as under:

(i)
In the first place, the assessee has to be a “company”. The word “company” is
defined in section 2(17) of the act. 
Such a company may have various business and one such business may be
the business of operating qualifying ships. However, it is only that income which
is generated from “the business of operating qualifying ships” that will be
computed as per the special provisions in Chapter XII-G. Income from other
business will be computed in the same manner as provided in sections 28 to 43C.
In case the business of the company is to operate qualifying ships only, then
the income from that sole business will be under this Chapter.

 (ii) 
Income from the business  of  operating 
qualifying ships shall be computed under Chapter XII-G  only if such an option is specifically
exercised by the assessee-company. This requirements is particularly mentioned
in section 115VP of the act. Such an option, when given, is to remain in force
for a period of ten years from the date on which the said option is exercised,
and this period is prescribed in section 115VQ
of the act. However, it can be renewed within one year from the end of the
previous year in which the option ceases to have effect (section 115VR). in
certain circumstances stipulated in section 115VS of the act, there is a
prohibition to opt for the scheme.

The
scheme that is to be opted for computation of income under this Chapter is
known as “tonnage tax scheme” (for short “TTS”) as defined in clause (m) of
section 115V of the act.

(iii)
Though these special provisions relate to income of shipping companies, it is
only that income which is received from business of “operating qualifying
ships” that is eligible for computation under this Chapter.

The
Supreme Court observed that it is only income from the business of operating
qualifying ship that has to be computed in accordance with the provisions of
Chapter XII-G. as per section 115VB of the act, 
a company is regarded as operating a ship if it operates any ship which
is owned by it or a ship which is chartered by it and it also includes a case
where even a part of the ship has been chartered by it in an arrangement such
as slot charter, space charter joint charter, etc.

The
Supreme Court further noted that the respondent­ assessee owned a qualifying
ship and fulfilled all other conditions as well as to make it a qualifying
company u/s. 115VC.  The income that was
generated from the said qualifying ship was exigible to tax as per the special
provisions contained in Chapter XII-G, as the assessee had exercised the
requisite option in this behalf. However, in addition to operating its
qualifying ship, in the relevant assessment years, i.e., 2005-06 and 2008-09 it
had also “slot charter” arrangements in other ships. In the relevant income-tax
return filed by the assessee, the assessee- had also included the income earned
from such slot charter arrangements for the purpose of computation thereof
under Chapter XII-G. it was in this context the question had arisen as to
whether the assessee was eligible to include the income derived from activities
through “slot charter” arrangements as relevant shipping income to determine
the deemed tonnage in terms of rule 11Q of the Income-tax Rules.

The
Assessing Officer was of the view that the income earned under slot charter
arrangement did not qualify for coverage to be given special treatment in
Chapter XII-G as this income was not generated by the assessee from its own
ship, i.e, it is neither from the ship owned by the assessee nor from the
entire ship chartered by the assessee. he took the view that in order to avail
of the benefit of Chapter XII-G, the assessee was supposed to show that the
ship operated by it was qualifying ship and for this purpose it was incumbent
upon the assessee to produce a “valid certificate indicating its net tonnage”
as provided in section 115VX(1)(b) of the act. However, the assessee had
submitted such valid certificate only in respect of its own ship and did not
submit the same in respect of ship chartered by the assessee under the slot
charter arrangement. The contention of the assessee was that the requirement of
producing “valid certificate” is to be insisted only for assessee’s own ships
and for the ships hired fully. This contention was not accepted by the
Assessing Officer. The assessee had also argued that as per the method of
computation provided u/s. 115VG of the act read with rule 11Q of the rules,
income for full ship is to be computed on the basis of “net tonnage” shown in
the valid certificate, whereas income of part of the ship is computed as
“deemed tonnage”. This argument was also rejected by the Assessing Officer on
the ground that there was a requirement of producing valid certificate even for
part of the ship and in the absence thereof income from slot charter
arrangement could not be included for the purpose of computation of tonnage
income under the tonnage tax scheme.

The
order of the Assessing Officer was upheld by the Commissioner of income-tax
(appeals) resulting into dismissal of appeal filed by the assessee. Even the
income-tax appellate tribunal  accepted
the view taken by the Assessing Officer and dismissed the appeal filed before
it by the assessee thereby upholding the order of the Assessing Officer.
However, in further appeal that was preferred by the assessee to the high  Court u/s. 260a of the act, the assessee has
succeeded in getting its way through as the high Court has found merit in its
contention. thus,  the high Court had
allowed the appeal of the assessee holding that the income earned by the
assessee under slot charter arrangement comes under the definition of “deemed
tonnage tax” as per Explanation to 
sub-section  (4)  of 
section  115VG  of  the
act,  and, therefore, exclusion of this
while assessing the same under the said special provisions was not appropriate.
in other words, the high Court held that the assessee was eligible for tonnage
on slot charter related income also.

On
appeal by the revenue, the Supreme Court noted that the assessee was a company
as defined u/s. 2(17) of the act and was also in the business of operating
qualifying ship(s). it was also not in dispute that it owned a qualifying ship
and fulfillment of this condition permitted the assessee to exercise its option
for computation of income from the business of operating qualifying ships under
Chapter XII-G of the act. The assessee exercised the option in this behalf, as
per section 115VP of the act in respect of assessment years in question.
Therefore,  the assessee was a qualifying
company u/s. 115VC of the act. In fact, the income that was generated from the
qualifying ship owned by the assessee was also assessed under the special
provisions contained in Chapter XII-G of the act. The dispute, however,
pertained to the income from the slot charter arrangements which the assessee
had made in other ships during the concerned assessment years. The ships where
slot charter were arranged were obviously not owned by the assessee.
Further,  as only some slots were
chartered, full ships were not chartered.

According
to  the 
Supreme  Court,  in 
this  context, the first question
would be as to whether such a slot charter could be treated as “operating
ships” within the meaning of section 115VB of the Act? This provision
specifically provides that for the purpose of Charter XII-G, a company would be
regarded as operating a ship “if it operates any ship whether owned or
chartered by it and includes a case where even a part of the ship has been
chartered by it in an arrangement such as slot charter, space charter or joint
charter”. The Supreme Court held that it was clear from the above that slot
charter was specifically included as an instance of a ship chartered by the
company.

Further,    the Supreme Court observed  that 
section 115VG(4)  was in two parts
in so far as computation of tonnage was concerned. When it came to tonnage of a
ship, a certificate as mentioned in 115VX was to be produced. The second part
of this provision talks about “deemed tonnage” in contradistinction to the
“actual tonnage” mentioned  in  the 
certificate.  The Supreme Court
held that thus, it was not only the actual tonnage that was mentioned in the
certificate referred to in 115VX of the act which this provision dealt with. In
addition, deemed tonnage was also to be included if there was such a deemed
tonnage, and that deemed tonnage was to be added to the actual tonnage which is
indicated in the certificate. Explanation to s/s. (4), inter alia, mentions
that in so far as slot charter arrangements are concerned, purchase of such
slot charter should be treated as deemed tonnage. according to the Supreme
Court the legislature  had, thus, clearly
visualied that in so far as deemed tonnage was concerned, there would not be
any possibility of producing a certificate referred to in section 115VX of the
act. When the provision is read in this manner, it becomes amply clear that section
115Vd of the act which talks of a qualifying ship, contemplates the situation
in which the entire ship is either owned or chartered. Similar is the position
which inheres in section 115VX of the act as it refers to “the tonnage of a
ship”. Therefore, whenever the question of a tonnage of a ship crops up and the
said tonnage is to be determined, it has to be in accordance with the valid
certificate indicating its tonnage and it is a compulsory obligation of the
assessee to produce such a certificate. However, this requirement of producing
a certificate would not apply when entire ship is not chartered and the
arrangement pertains only to purchase of slots, slot charter and an arrangement
of sharing of break-bulk vessel.

The
Supreme Court further held that calculation of income arising from carriage of
goods on slot basis has, in the wisdom of the legislature, been disconnected
from the capacity of a ship, on account of impossibility of getting such
information in relation to ships on which slot charter is undertaken. This
aspect has due recognition in note 3 of the form 66. Thus, the act and the
rules for computation on tonnage tax specifically and categorically
differentiate the requirement of the certificate with regard to owned ship and
slot charter. In law, the said rule also recognises that identification of the
vessel for slot charter cannot be done. Also, note 3 below form no.66, in terms
of rule 11T, recognises the reason for prescribing a separate formula for slot
charter.

The
Supreme Court agreed with the decision of the high Court and dismissed the
appeal of the revenue.

Business Loss – A licensee/assessee may be entitled to claim the forfeited amount of licence fees paid on cancellation of license by Excise Department as business loss but in a case where the licensee/ assessee transfers his licence and forfeiture of licence take place thereafter the loss cannot be allowed.

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CIT vs. Preetam Singh Luthra (2016) 386 ITR 408 (SC)

The Assessing Officer (AO) denied
to set off the loss on account of forfeiture of licence fee of Rs.3,93,67,000,
against income as claimed by the assessee and added the said amount of Rs.3,93,67,000
as unexplained investment.

In appeal preferred by the assessee,
the Commissioner (appeals) held that the addition made by the assessing Officer
at Rs.3,93,67,000, which was actually Rs.2,32,33,500 was not sustainable on
account of later confiscation of the amount so deposited and accordingly, the
entire addition was directed to be deleted.

Dissatisfied with the order of
the Commissioner (Appeals), the Revenue filed appeal before the Tribunal. The
Tribunal, after considering the arguments of for the parties, placing reliance
on the judgment passed by the madras high Court in the case of CIT vs. Chensing
Ventures [2007] 291 ITR 258 (Mad) held that since the assessee was allotted the
licence by the excise department, which was later on transferred to one Shankar
lal Patidar but the said licence was cancelled by the excise department and the
amount of licence fees deposited by the petitioner was forfeited by the excise
department, the assessee was entitled to set off on account of such forfeiture.

The High Court dismissed the
appeal filed by the Revenue holding that no question of law arose in the
matter.

On  further appeal by the revenue, the Supreme
Court held that if the licence fee stood forfeited, the licensee/ assessee may
be entitled to claim the forfeited amount as a business loss. However in the
present case, from the grounds urged before the high Court which facts had not
been controverterd by the assessee, it appeared that the respondent had transferred
the licence on 25th june, 2005 to one Shankarlal Patidar and the forfeiture of
the said licence took place thereafter on 1st august, 2005. According to the
Supreme Court, if that be so, the loss, if any, on account of forfeiture was
sustained not by the respondent-assessee but by the transferee-Shankarlal
Patidar.

The Supreme Court therefore
concluded that the tribunal and the high Court had overlooked the aforesaid
vital fact, and therefore the orders passed by the learned tribunal and the
high Court were required to be reversed. Consequently, the Supreme Court set
aside the order of the High Court affirming the order of the Tribunal and the
Commissioner of income-tax (appeals) passed in favour of the assessee and
affirmed the order of the Assessing Officer disallowing the aforesaid claims of
the assessee.

Business Income or Income from House Property – Assessee having one business of leasing its property and earning rent therefrom – Rent received from property should be treated as business income-

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Rayala Corporation Pvt. Ltd. vs. ACIT [2016] 386 ITR 500 (SC)

The appellant-assessee, a private
limited company, was having house property, which had been rented.  The issue that arose before the Supreme Court
was whether the income so received should be taxed under the head “Income from
house property” or “Profit and gains of business or profession”. the  reason for which the aforestated issue had
arisen was that though the assessee was having the house property and was
receiving income by way of rent, the case of the assessee was that the assessee
company was in business of renting its properties and was receiving rent as its
business income, the said income should be taxed under the head “Profits and
gains of business or profession” whereas the case of the revenue was that as
the income was arising from house property, the said income should be taxed
under the head “income from house property”.

According to the Supreme Court,
the law laid down by it in the case of Chennai Properties and Investments Ltd.
vs. CIT (2015) 373 ITR 673 (SC) showed the correct position of law and looking
at the facts of the case in question, the case on hand was squarely covered by
the said judgment.

The Supreme Court noted the
submissions made by the counsel appearing for the revenue which were to the
effect that the rent should be the main source of income or the purpose for
which the company was incorporated should be to earn income from rent, so as to
make the rental income to be the income taxable under the head “Profits and gains
of business or profession”.

The Supreme Court observed that
it was an admitted fact in the instant case that the assessee company had only
one business and that was of leasing its property and earning rent therefrom. Thus,
even on the factual aspect, the Supreme Court did not find any substance in
what had been submitted by the learned counsel appearing for the revenue.

The  Supreme Court held that the business
of the company was to lease its property and to earn rent and
therefore, the income so earned should be treated as its business income
and that the high Court was not correct while deciding that the income
of the assessee should be treated as income from house property,

6. Reassessment – Full and true disclosure – Giving value of land in a certificate of registered architect and engineer supplied in response to a query would not amount full and true disclosure of the actual asset of plot – Reopening was valid

M/s. Girilal and Co. vs. ITO and Ors.(2016) 387 ITR 122
(SC)

The appellant, a partnership firm, was engaged in the
business of construction of building and development of real estate. In the
year 2000, the appellant/firm was engaged in developing two housing projects on
a plot bearing CTS No. 329 B(Part) of village Kondiwita in Andheri (East)
Mumbai (hereinafter referred to as “the said plot”). The said plot was acquired
by the appellant originally as a capital asset but portion thereof was
converted at different point of time into stock-in-trade. The appellant on
October 29, 2001 filed its return of income for the assessment year 2001-02. On
May 1, 2003, an assessment order was passed u/s. 143(3) of the Act determining
the total income at Rs. 12,36,393 after allowing deduction u/s. 80-1B (10) of
the Act. After scrutiny of the said return of income, a notice dated March 15,
2007, was served on the appellant u/s. 148 of the Income-tax Act, 1961
(hereinafter referred to as “the Act” ) inter alia alleging that the
appellant’s income chargeable to tax for the assessment year 2001-02 has
escaped assessment within the meaning of section 147 of the Act. Vide
communication dated April 11, 2007, the appellant sought the reason recorded
for reopening the assessment which were made available to the appellant on
April 12, 2007. It was found that the appellant had not correctly disclosed the
actual *assets of the said plot and hence, the appellant was not entitled for
deduction u/s. 80(1B)(10) of the Act. It was noted that the information
regarding the actual size of the plot used for the construction was only
available in the valuation report and hence, the case was covered under
Explanation 2(c)(iv) of section 147 of the Act. The appellant objected to the
assumption of jurisdiction u/s. 148 for the reason that the appellant had
disclosed all the facts fully and truly and respondent No. 1 was fully aware of
the floor space index. Respondent No.2 rejected the objections. Being
aggrieved, the appellant preferred a writ petition before the High Court
challenging the notice dated March 15, 2007 issued u/s. 147 of the Act. The
High Court vide impugned judgment dated December 12, 2007 dismissed the
writ petition. The High Court was of the opinion that as there was no true
disclosure of the exact size of the plot when the new construction commenced it
prima facie could not be said that there were no reasons to believe. The
information was in the annexures and consequently Explanation 2(c)(iv) of
section 147 of the was applicable. 
Accordingly, to the High Court, the question was whether the petitioners
considering the size of the plot and part of it having already been developed
could claim the benefit u/s. 80-1B (10) of the Income-tax Act. The issue as to
whether the size of the plot of land to be considered at the time the new
construction is being put up or whether the building already constructed
including various deduction like R. G. Area, set back had to be considered in
computing the size of the plot was an issue which it did not wish to answer at
the stage in the exercise of their extraordinary jurisdiction.

Before the Supreme Court, the Learned Senior Counsel
appearing on behalf of the appellant/firm submitted that there was no reason to
reopen the assessment when in the return filed by the appellant full disclosure
of all the relevant facts was made. On this basis, it was further argued that
it was merely a case of change of opinion which was not a valid ground for
reopening of the assessment. He drew the attention of the Supreme Court to the
communication dated February 10, 2003 addressed by the appellant to the
Assessing Officer. In para 11 thereof, there was a mention about the land in
question. The Supreme Court rejected the aforesaid submissions of the learned
senior counsel for the appellant as according to the Supreme Court, in para 11,
only the value of the land was stated and in support, a certificate from the
registered architect and engineer was filed. The Supreme Court held that it was
clear from the above that this information was supplied as there was some query
about the value of the land. Obviously, while going to this document the
Assessing Officer would examine the value of the land. However, the reason for
issuing notice u/s. 148 of the Income-tax Act was that the appellant had not
correctly disclosed the actual *assets of the plot and hence, it was not
entitled for deduction u/s. 80-IB (10) of the Act. The income-tax authority
itself had mentioned in the notice u/s.148 of the Act that such information was
available only in the valuation report. Giving the information in this manner
was of no help to the appellant as the Assessing Officer was not expected to go
through the said information available in the valuation report for the purpose
of ascertaining the actual *construction of the plot.

On the facts of this case, therefore, the Supreme Court found
that the Revenue was right in reopening the assessment and the High Court had
rightly dismissed the writ petition of the appellant challenging the validity
of the notice u/s. 148 of the Act.

*
Note: This should be the size of the plot. _

Business Expenditure – Provision for interest in terms of compromise agreement with bank is an ascertained liability.

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CIT v. Modern Spinners Ltd. (2016) 382 ITR 472 (SC)

The assessee filed a return for the assessment year 1995- 96 on Novembr 24, 1995, declaring a loss of Rs.57,99,781. During the course of the assessment proceedings, the Assessing Officer specifically required the assessee to show cause why the provision of interest of Rs.49.23 lakh should not be disallowed as the provision amounted to unascertained liability. After granting opportunity to the assessee, the deduction for the said amount of interest was disallowed by the Assessing Officer. Against this order, the assessee preferred an appeal which was also dismissed by the Commissioner of Income Tax (Appeals). The view taken by the Assessing Officer as well as the Commissioner of Income Tax (Appeals), was set aside by the Income-tax Appellate Tribunal upon appeal by the assessee.

The Tribunal held that the assessee had provided interest liability only at the rate of 10 per cent which was as per the compromise agreement with the bank and not as per the original terms and conditions of loan. Therefore, it could not be treated to be a contingent liability, rather it was an ascertained liability. According to the Tribunal the assessee could not be penalized for claiming less interest liability.

The High Court dismissed the appeal of the Revenue holding that it was not an unilateral act on the part of the assessee but was a bilateral consented action on behalf of the parties which was of binding in terms of the agreement and as such it could not be termed as an unascertained liability.

On further appeal by the Revenue to the Supreme Court it was held that the matter was covered against the Revenue by the judgment of the Supreme Court in Taparia Ltd. vs. Joint CIT [2015] 372 ITR 605 (SC).

Export – Special Deduction – Computation of deduction u/s. 80HHC – 90% of the net commission (and not gross) has to be reduced from the profits of the business for determining deduction under section 80HHC.

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Veejay Marketing vs. CIT [2016] 382 ITR 395 (SC)

While completing the assessment for the assessment years 1993-94 and 1994-95 u/s. 143(3) of the Act, the Assessing Officer found that the assessee had reduced 90 per cent of the net commission while working out the profits of business under the Explanation (baa) to section 80HHC of the Act.

The Assessing Officer held that 90 per cent of gross commission receipts had to be deducted from the profits of the business and accordingly, allowed deductions under section 80HHC for the said assessment years on that basis.

Aggrieved against the said orders of the Assessing officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals). The Appellate authority held that only 90 per cent of the net commission had to be deducted from the profit of the business and accordingly, directed the Assessing Officer to redo the exercise.

Against the said orders of the Commissioner of Income Tax (Appeals), the Revenue preferred appeals before the Income-tax Appellate Tribunal.

The Income-tax Appellate Tribunal, by following the decision of the Income-tax Appellate Tribunal, Delhi Bench ‘E’ (Special Bench) in Lalsons Enterprises vs. Deputy CIT [2004] 89 ITD 25 (Delhi) [SB], held that only 90 per cent of the net commission had to be reduced from the profit of the business for determining deduction under section 80HHC of the Act.

Against the said order of the Tribunal, the Revenue filed the appeals before the High Court.

By following the ratio laid down in the CIT vs. Chinnapandi [2006] 282 ITR 389 (Mad), in which it was held that 90% of the gross interest had to be reduced from the profits of the business for determining deduction under section 80HHC, the High Court held that the reasons given by the Tribunal in the impugned order were not sustainable. Accordingly, the order of the Tribunal was set aside.

On appeal to the Supreme Court, it was held that these cases were covered by the decision in ACG Associated Capsules Private Ltd. (Formerly Associated Capsules Private Ltd.) vs. CIT [2012] 343 ITR 89 (SC). Accordingly, the issue arising in the appeal was answered in favour of the assessee and against the Revenue. The Supreme Court allowed the appeals and the order of the High Court was set aside and the matter was remanded to the Assessing Officer for a fresh consideration.,

Refund –When an amount though found refundable to the assessee is utilised by the Department, interest is payable u/s. 244(1A) for the period of such utilization.

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CIT v. Jyotsna Holding P. Ltd. [2016] 382 ITR 451 (SC)

The
Supreme Court took note of the facts in respect of the assessment year 1987-88
(similar fact situation appeared in respects of all three assessment years viz.
1985-86, 1986-87 and 1987-88.) For the assessment year 1987- 88, the respondent
filed its return on the basis of self tax assessment made by it and paid a sum
of Rs.3,23,68,834 on September 12, 1987. The assessment was made u/s. 143(3) by
the assessing authority on March 28, 1988, as per which an amount of
Rs.2,03,29,841 was found refunable to the respondent/assessee. Instead of
immediate refund of this amount, the assessing authority ordered that the same
would be adjusted against the demand for the year 1986-87. It was ultimately
adjusted on July 25, 1991. The question that arose, in these circumstances, was
as to whether the assessee would be entitled to interest on the aforesaid
amount which was kept by the Revenue for the period from March 28, 1988 to July
25, 1991. The assessee claimed the interest, which request was rejected by
Assessing Officer. However, the Commissioner of Income-tax (Appeals) allowed
the appeal of the assessee against the order of the Assessing Officer by
invoking the provisions of section 244(1A) of the Income-tax Act and held that
the interest was payable on the aforesaid amount. This order was upheld by the
Income-tax Appellate Tribunal as well as by the High Court.

On appeal, the
Supreme Court after going through the order of High Court did not find anything
wrong with the same. According to the Supreme Court the amount in question,
though found refundable to the assessee, was utilized by the Department and,
therefore, interest was payable u/s. 244(1A) of the Income-tax Act.

Income – Sums collected towards contingent sales tax liability not income especially when it was demonstrated that the same were refunded to the persons from whom the same was collected

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CIT vs. Khoday Breweries Ltd. (2016) 382 ITR 1 (SC)

Agreement – The fact that the agreement is with a retrospective effect, would not make it a sham transaction

The assessee, a manufacturer of liquor, in course of business used to sell liquor to dealers in sealed bottles with proper packing. The question whether the assessee was liable to pay sales tax towards bottles and packing material supplied to the dealers was a debatable question. Therefore, in order to safeguard the business interest, the assessee had collected certain amounts towards the doubtful tax liability. The assessing authority for the assessment years 1988-89 and 1989-90 had found that the amounts received from the dealers towards doubtful liability was a disguised collection of additional sale price and that the books of account of the dealers showed that payment of this additional amount was a part of the sales price. Therefore, the assessing authority held that the amount received towards anticipated tax liability was subject to assessment for tax.

The assessee had taken the premises of its sister concern along with machinery, i.e., the boiler (furnace) for manufacture of liquor. The warranty of life span of the boiler was said to be 6 to 7 years. In the term of lease, the rent was agreed at Rs.52,50,000 per annum for the above assessment year. The boiler went out of order. The lessor revamped the equipment and machinery. Accordingly, the assessee entered into a fresh agreement with lessor to enhance the rental to Rs.90,00,000 per annum. The assessing authority found that the enhanced agreement was a sham agreement and rejected the claim for deductions.

In appeal, the Commissioner of Income-tax (Appeals) upheld the order of the assessing authority and held that the amount received towards doubtful tax liability were liable for assessment of tax. With regard to enhancement of lease rent, the Commissioner of Income-tax held that towards part of cost of revamp of equipment, the assessee was entitled for deduction of Rs.12,50,000. The balance of enhanced amount of lease was held as sham and was liable for tax.

The Tribunal in appeal held that on both the questions, the assessee was not liable to tax since the amount received towards doubtful tax liability was refundable to the dealers. Therefore, it was not in the nature of income for tax. So also in respect of enhanced rent, it was found that in view of revamp of the machinery, fresh rent agreement was entered into warranting the payment of higher rent and the said agreement is not a sham transaction. The appeal filed by the assessee was allowed accordingly. The appeal filed by the Revenue before the Tribunal regarding grant of partial deduction in the rental amount was dismissed.

At the hearing of the reference/appeal filed by the Revenue before the High Court, it was a categorical contention of the assessee that the amount in dispute was received from the dealers towards the doubtful tax liability. The asessee had also let in evidence of the dealers before the assessing authority that the advance amounts received had been refunded to them.

The High Court held that the liability to pay sales tax towards bottle and packing material was a doubtful question open for debate. Later on the assessee had refunded the amount to the dealers. In that view, the findings of the Tribunal that the said amount did not attract tax liability was sound and proper. Further, the documentary evidence disclosed that during the assessment year in question, the machinery was revamped. In that view, a fresh agreement was entered into to pay higher rent of Rs.90,00,000 instead of Rs.52,50,000. The fact that the agreement was with retrospective effect, would not make it a sham transaction. The lessor was also an assessee. The amount paid has been accounted by the lessor in installments. Therefore, the assessee was entitled to legitimate deduction towards the enhanced rent.

On a SLP being filed by the Revenue, the Supreme Court held that in view of the factual determination made by the High Court that the amounts realised to meet the contingent sales tax liability of the assessee had since been refunded to the persons from whom the same was collected and also a finding had been reached that the agreement enhancing the lease rent was not a sham document, it found no ground to continue to entertain the present special leave petition

Deduction of tax at source – Interest paid to the owners of the land acquired – Whether deduction to be made u/s. 194A – Matter remitted to the High Court as no reasons had been given by the High Court in the impugned order

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Commissioner, Development Belgaum Urban Authority vs. CIT (2016) 382 ITR 8 (SC)

On gathering information about the payment of interest by the assessee to the owners of the land for delayed payment of compensation consequent upon the acquisition of land, enquiry was conducted and information was obtained by the Income Tax Department and it was found that no deduction has been made u/s. 194A of the Act in respect of the interest paid to the owners of the land acquired and accordingly, after due procedure order was passed by the Tax Recovery Officer, Belgaum u/s. 201(1) and 201(1A) of the Act, holding that the assessee had contravened the provisions of section 194A in not deduction the tax at source in respect of payment of interest for belated payment of compensation for the land acquired. Tax was levied amounting to Rs.1,96,780 and interest of Rs.59,260 was demanded and total demand of Rs.2,56,040 was made. Being aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Belgaum and the appellate authority, allowed the appeal. Being aggrieved by the same, the Revenue preferred appeal before the Tribunal. The Tribunal confirmed the order passed by the appellate authority holding that there was no liability and that section 194A was not applicable in respect of payment of interest for belated payment of compensation for the land acquired and accordingly dismissed the appeal of the Revenue.

On further appeal by the Revenue, the High Court reframed the following substantial question of law:

“Whether the finding of the Tribunal confirming the order of the appellate authority holding that there was no liability on the respondent to deduct tax on the interest payable for belated payment of compensation for the land acquired and in holding that section 194A was not applicable for such payment is perverse and arbitrary and contrary to law?”

The High Court allowed the appeal of the Revenue by following the judgment of the Hon’ble Supreme Court in Bikram Singh v Land Acquisition Collector (1997) 224 ITR 551 (SC).

The said judgment read as follows (page 557 of 224 ITR):

“But the question is: whether the interest on delayed payment on the acquisition of the immovable property under the Acquisition Act would not be exigible to income-tax? It is seen that this court has consistently taken the view that it is a revenue receipt. The amended definition of “interest” was not intended to exclude the revenue receipt of interest on delayed payment of compensation from taxability. Once it is construed to be a revenue receipt, necessarily, unless there is an exemption under the appropriate provisions of the Act, the revenue receipt is exigible to tax. The amendment is only to bring within its tax net, income received from the transaction covered under the definition of interest. It would mean that the interest received as income on the delayed payment of the compensation determined u/s. 28 or 31 of the Acquisition Act is a taxable event. Therefore, we hold that it is a revenue receipt exigible to tax under section 4 of the Income-tax Act. Section 194A of the Act has no application for the purpose of this case as it encompasses deduction of the incometax at source. However, the appellants are entitled to spread over the income for the period for which payment came to be made so as to compute the income for assessing tax for the relevant accounting year.”

Being aggrieved, the assessee approached the Supreme Court.

The Supreme Court while issuing notice in these appeals passed the following order:

“Issue notice as to why the matters should not be remitted. In the Impugned order, no reasons have been given by the High Court. Hence, matters need to be sent back. This is prima facie opinion.”

The learned Counsel for the Revenue when confronted with the said position reflected in the order submitted that he had no objection if the matter was remitted to the High Court for fresh consideration.

The impugned order passed by the High Court was, accordingly, set aside and the case are remitted back to the High Court for deciding the issue afresh by giving detailed reasons after hearing the counsel for the parties.

Charitable Trust – Registration of Trust – Once an application is made u/s. 12A and in case the same is not responded to within six months, it would be taken that the application is registered on the expiry of the period of six months from the date of the application

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CIT vs. Society for the Promotion of Education, Adventure Sport and Conversation of Environment (2016) 382 ITR 6 (SC)

The assessee, a society running a school, claimed that up to the assessment years 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.

Section 10(22), being omitted by the Finance Act, 1998, the assessee applied for registration u/s. 12A of the Act with retrospective effect, that is, since the inception of the assessee-society, i.e., January 11, 1993. An application for the purpose was duly made on February 24, 2003. Inasmuch as u/s. 12A(1)(a) (as it stood at the time of making the application), the application was required to be made within one year from the date of creation of establishment of the trust or institution, therefore, condonation of delay was sought in terms of section 12A(1)(a), proviso (i).

Section 12AA(2) provides that every order granting or refusing registration under clause (b) of s/s. (1) shall be passed before the expiry of six months from the end of the month in which the application was received u/s. 12A(1) (a) or 12A(1)(aa).

No decision was taken on the assessee’s application within the time of six months fixed by the aforesaid provision.

For want of a decision by the Commissioner, the Assessing Officer continued to make assessment denying the benefit u/s. 11.

On a writ being filed to the High Court, the High Court examined the consequence of such a long delay of almost five years on the part of the income-tax authorities in not deciding the assessee’s application dated February 24, 2003.

According to the High Court, after the statutory limitation the Commissioner would become functuous officio and could not therafter pass any order either allowing or rejecting the registration.

The High Court took the view that once an application is made under the said provision and in case the same is not responded to within six months, it would be taken that the application is registered under the provision.

The Revenue appealed to the Supreme Court against the aforesaid order of the high Court. However, when the matter came up for hearing, the learned Additional Solicitor General appearing for the Revenue, raised an apprehension that in the case of the assessee, since the date of application was of February, 24, 2003, at the worst, the same would operate only after six months from the date of the application.

According to the Supreme Court there was no basis for such an apprehension since that was the only logical sense in which the judgment could be understood. Therefore, in order to disabuse any apprehension, it was made clear that the registration of the application u/s. 12AA of the Income-tax Act in the case of the assessee would take effect from August 24, 2003.

Purchase of immovable property by Central Government – Development Agreement/ Collaboration Agreement and in any case an arrangement which has the effect of transferring or enabling the enjoyment of property falls within the definition of “Transfer” in section 269UA – Order of pre-emptive purchase gets vitiated where the authority fails to record a finding on the relevance of comparable sale instance

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Unitech Ltd. vs. Union of India (2016) 381 ITR 456 (SC)

Vidarbha Engineering Industries – appellant No.2 held on lease, three plots of land admeasuring 2595.152 sq. mtrs., i.e., 27934 sq. ft. at Dahipura and Untkhana, Nagpur. This land was comprised of three plots of land, i.e., Plot Nos. 34, 35 and 36 obtained by Vidarbha Engineering from the Nagpur Improvement Trust. Vidarbha Engineering decided to develop the subject land and entered into an agreement for the purpose with Unitech Ltd. The memorandum of understanding between them was formalised into a collaboration agreement dated March 17, 1994. Under this agreement the land holder agreed to allow Unitech to develop and construct a commercial project on subject land admeasuring 2595.152 sq. mtrs. at the technical and financial cost of the latter. The parties to the agreement agreed, upon construction of the multi storied shopping cum commercial complex, that Unitech will retain 78% of the total constructed area and transfer 22% to the share of Vidarbha Engineering Unitech agreed to create an interest-free security deposit of Rs.10 lakhs. 50% of the deposit was made refundable on completion of the RCC structure and the other 50 per cent. on completion of the project. The parties were entitled to dispose of the saleable area of their share. It was specifically agreed that this agreement was not to be construed as a partnership between the parties. In particular, this agreement was not to be construed as a demise or assignment or conveyance of the subject land.

The appellant submitted a statement in form 37-I u/s. 269UC of the Act annexing the agreement dated March 17, 1994.

This form contained only the nomenclatures of the transferor and transferee and contemplated only the transaction of a transfer and not an arrangement of collaboration. Therefore, the appellants were to described themselves as transferor and a transferee. Accordingly, they mentioned that the consideration for the transfer of the subject property was Rs. 100.40 lakhs towards the cost of share of 22% of Vidarbha Engineering, which was to be constructed by Unitech-builder at its own cost.

Upon the submission of the statement under section 269UA of the Act, the Appropriate authority issued a showcause dated July 8, 1994, stating that the consideration for the transaction appeared to be too low and appeared to be understated be more than 15%, having regard to the sale instance of a land in Hanuman Nagar, an adjoining locality, the rates per sq. ft. of FSI of which worked out to Rs 283, whereas the such a rate in case of the appellants worked out to Rs. 184 (1,00,40,000 – 56,473).

In reply to the show-cause notice the appellants raised several objections to the alleged undervaluation including the existence of encumbrances and other aspects. In particular, the appellants pointed out a sale instance of a comparable case approved by the authorities where the FSI cost on the basis of apparent consideration came to Rs. 90 per sq. ft. This was in respect of a property in the very same locality in which the subject land is located.

The appropriate authority considered the objections filed by the appellants and rejected them by an order dated July 29, 1994, passed u/s. 269UD of the Income-tax Act. The authority rejected all the objections taken by the appellants. The authority validated the sale instance relied on in the show-cause notice without giving any finding on the specific objections raised. It rejected the sale instance relied on by the appellants of a property in the same locality on the ground that that property does not have road on the three sides like the property under consideration there is a nallah carrying waste water near that property and it has a frontage of only 12.5 mtrs. It took into account the consideration of Rs.1,00,40,000 and deducted from it an amount of Rs. 24,09,600 being discount calculated at the rate of 8% per annum since the consideration had been deferred for a period of three years. It, therefore, determined the consideration for purchase of the subject property at Rs.76,30,400.

By a writ petition before the High Court challenging the compulsory pre-emptive purchase, the appellants raised several contentions. They maintained that the impugned order did not contain any finding that the consideration for the transaction was undervalued by the parties in order to evade taxes, which is the mischief sought to be prevented. The High Court, however, dismissed the petition of the appellants. Being aggrieved, the appellants approached the Supreme Court.

The Supreme Court noted that Vidarbha Engineering itself is a lessee holding the land on lease of 30 years from Nagpur Improvement Trust. It has no authority to transfer the land. Further, no clause in the agreement purported to transfer the subject land to Unitech. On the other hand, clause 4.6 specifically provided that nothing in the agreement shall be construed to be a demise, assignment or a conveyance. The agreement thus created a licence in favour of Unitech under which the latter may enter upon the land and at its own cost build on it and thereupon handover 22% of the built-up area to the share of Vidarbha Engineering as consideration and retain 78% of the built up area. The Supreme Court observed that it may appear at first blush that the collaboration agreement involved an exchange of property in the sense that the land holder transferred his property to the developer and the developer transferred 22% of the constructed area to the land holder but on a closer look this impression was quickly dispelled.

The Supreme Court noted that the word “Exchange” was defined vide section 118 of the Transfer of Property Act, 1882 as a mutual transfer of the ownership of one thing for the ownership of another. But it was not possible to construe the license created by Vidarbha Engineering in favour of Unitech as a transfer or acquisition of 22% share of the constructed building as a transfer in exchange. Vidarbha Engineering was not an owner but only a lessee of the land. As such, it could not convey a title which it did not possess itself. In fact, no clause in the agreement purported to effect a transfer. Also in consideration of the license Unitech had agreed that the Vidarbha Engineering will have a share of 22% in the constructed area. Thus it appeared that what was contemplated was that upon construction Unitech would retain 78% and the share of Vidarbha Engineering would be 22% of the built-up area vide clause 4.6 of the agreement . Thus the transaction could not be construed as a sale, lease or a licence.

The Supreme Court noted that in terms of section 269UA(d) of the Act “Immovable property” consisted of : (a) not only land or building vide sub-clause (i) but also (b) any rights in or with respect to any land or building Including building which is to be constructed.

“Transfer” of such right in or with respect to any land or building was defined in clause (f) of section 269UA of Act as the doing of anything which had the effect of transferring, or enabling the enjoyment of, such property. According to the Supreme Court, the question whether the collaboration agreement constituted transfer of property, therefore, should be answered with reference to clauses (d) and (f) which defined immovable property and transfer. The Supreme Court held that it was clear from the agreement that the transfer of rights of Vidarbha Engineering in its land did not amount to any sale, exchange or lease of such land, since only possessory rights had been granted to Unitech to construct the building on the land. Nor was there any clause in the agreement expressly transferring 22 per cent. of the building to Vidarbha after it is constructed by Unitech. Clause 4.6 only mentioned that as a consideration for Unitech agreeing to develop the property it shall retain 78 per cent. and the share of Vidarbha Engineering would be 22 per cent .

The Supreme Court observed that in fact Parliament had defined “transfer” deliberately wide enough to include within its scope such agreements or arrangement which have the effect of transferring all the important rights in land for future considerations such as part acquisition of shares in buildings to be constructed, vide sub-clause (ii) of clause (f) of section 269UA. There was no doubt that the collaboration agreement could be construed as an agreement and in any case an arrangement which has the effect of transferring and in any case enabling the enjoyment, of such property. Undoubtedly, the collaboration agreement enabled United to enjoy the property of Vidarbha Engineering for the purpose of construction. There was also no doubt that an agreement was an arrangement. The Supreme Court therefore held that the collaboration agreement effectuated a transfer of the subject land from Vidarbha Engineering to Unitech within the meaning of the term in section 269UA of the Act. It appeared tocover all such transactions by which valuable rights in property are in fact transferred by one party to another for consideration, under the word “transfer”, for fulfilling the purpose of pre-emptive purchase, i.e. prevention of tax evasion. The supreme Court approved the judgment of the Patna High Court in Ashis Mukerji vs. Union of India (1996) 222 ITR 168 (Pat) which took the view that a development agreement was covered by the definition of transfer in section 269UA.

The Supreme Court however further noted that the authority took the consideration for the land to be Rs. 1,00,40,000 which was the consideration stated by the appellant in the statement as a consideration for the transfer of subject property, i.e. plot Nos. 34, 35 and 36 admeasuring 2595.152 sq. mtrs. = 27,934 sq ft. According to the Supreme Court, it was however, difficult to imagine how or why the authority had considered the consideration to be for 56,473 sq. ft. (of available FSI). This had obviously resulted in showing a lower price of Rs. 184 per sq. ft. of FSI and enabling the authority to draw a prima facie conclusion that the consideration was understated by more than 15% in comparison to the sale instance for which the price appears to be Rs.283 per sq. ft. of FSI. If the authority had to take into a account the consideration of Rs.1,00,40,000 for 27,934 sq.ft. to a piece of land as stated by the appellants the rate would have been Rs. 359.41 per sq. and the rate of the sale instance would have been Rs. 246.14 per. sq. ft. According to the Supreme Court, the authorities had thus committed a serious error in taking the consideration quoted by the appellants for the entire subject land, i.e. 27,934 sq. ft. as consideration for the transfer of the available FSI i.e., 56,473 sq ft. thus showing an unwarranted undervaluation. The Supreme Court further noted that the authorities had treated the consideration for subject land, which was an industrial plot, as understated by more than 15% on the basis of a sale instance of a land which is in a residential locality and also that the area of the sale instance was of much smaller plot of 736 sq mtrs whereas the subject land was 2,024 sq. mtrs.

According to the Supreme Court, the authority fell into a gross and an obvious error while conducting this entire exercise of holding that the consideration for the subject property was understated in holding that Vidabha Engineering had transferred property to the extent of 78% to Unitech. There was no warrant for this finding since Vidabha Engineering was never to be the owner of the entire built-up area. It only had a share of 22% in it. Unitech., which had built from its own funds, was to retain 78% share in the built-up area. And in any case the appellants had never stated that the consideration for Rs. 1,00,40,000 was in respect of the built-up area but on the other hand had clearly stated that it was for transfer of the subject land.

The Supreme Court held that the High Court had failed to render a finding on the relevance of comparable sale instances, particularly, why a sale instance in an adjoining locality had been considered to be valid instead of a sale instance in the same locality. Also, it had missed the other aspects referred hereinbefore.

The Supreme Court therefore, allowed the appeal of the appellants and set aside the orders of the High Court and that of the appropriate authority.

Interest-tax Act – Reassessment – Where there is no assessment order passed; there cannot be a notice for reassessment inasmuch as the question of reassessment arises only when there is an assessment in the first instance.

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Standard Chartered Finance Ltd. vs. CIT [2016] 381 ITR 453 (SC)

On the return of chargeable interest filed by the appellant/assessee under the Interest-tax Act, 1974 for the assessment year 1997-98, no assessment order was passed. However, much after the last date of the assessment year was over, the Assessing Officer sought to reopen the assessment by issuing notice u/s. 10 of the Act and thereafter proceeded to reassess the interest chargeable under the aforesaid Act. The matter was carried in appeal by the assessee. The main contention of the assessee was that when there was no assessment order passed in the original proceedings there was no question of reopening the so-called assessment and make the reassessment. The Commissioner of Incometax (Appeals) accepted the aforesaid contention and set aside the reassessment order. This order was upheld by the Income-tax Appellate Tribunal (“the Tribunal”) as well. However, in further appeal by the Revenue before the High Court, the High Court reversed the view taken by the Tribunal holding that even if there was no original assessment order passed u/s.10 of the Act, there could be a reassessment. The assessee had relied upon various judgments in support including the judgment of the Supreme Court in Trustees of H.E.H. the Nizam’s Supplemental Family Trust vs. CIT [2000] 242 ITR 381 (SC). The High Court held that the said judgment would not govern the case at hand.

The Supreme Court after hearing the learned counsel for the parties, was of the opinion that the High Court had wrongly ignored upon the ratio laid down in Trustees of H. E. H. the Nizam’s Supplemental Family Trust’s case which squarely applied in the instant case in favour of the assessee. The ratio of the said judgment was that in those situations where there is no assessment order passed, there could not be a notice for reassessment inasmuch as the question of reassessment arises only when there is an assessment in the first instance.

The Supreme Court allowed the appeal and set aside the order passed by the High Court.

Depreciation – Carry forward and set off – Amendment to section 32(2) by the Finance (No.2) Act, 1996 – Effect – Unabsorbed Depreciation as on 1-4-1997 can be set off against income from any head for assessment year immediately following 1-4-1997 and thereafter unabsorbed depreciation if any to be set off only against business income for a period of eight assessment years.

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Peerless General Finance and Investment Co. Ltd. vs. CIT [2016] 380 ITR 165 (SC)

The Tribunal had held that under the provisions of section 32(2)(iii)(a) and (b) the amount of unabsorbed depreciation allowance shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; if not wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed.

The Tribunal further held that since in this case, business income after adjusting brought forward business loss had been determined at nil, therefore, in the absence of any other business income, the amount of brought forward unabsorbed depreciation allowance shall not be set off from the other income, i.e., income from “house property” and “Other Sources” and shall be carried forward to the following assessment year(s) as per the provisions of section 32(2)(iii)(a) and (b) of the Income-tax Act, 1961.

The High Court admitted the appeal on the following questions:

(i) Whether, on the facts and in the circumstances of the case, the Tribunal erred in construing the amendment of section 32(2) by the Finance (No.2) Act, 1996, as retrospective in effect so as to preclude the assessee’s claim for adjustment of accumulated unabsorbed depreciation allowance brought forward as on the 1st April, 1997, from earlier years against income from house property and income from other sources for the assessment year 1998-99 ?

(ii) Whether the assurance of the Finance Minister in Parliament that set off of the cumulative unabsorbed depreciation brought forward from earlier years as on April 1st, 1997, can be set off against the profits and gains of a business or profession or any other income of the taxpayer for the assessment year 1997-98 and subsequent year forms part of the legislative intent and any construction contrary thereto is erroneous?

The High Court held that the provisions introduced suggest that where the unabsorbed depreciation allowance could not be wholly set off against the profits and gains, if any, of any business or profession carried on by the assessee, the unabsorbed depreciation allowance could be set off from the income under any other head during the assessment year 1997-98. If the unabsorbed depreciation allowance could only be wholly set off during the assessment year 1997-98, the left over could only be set off against the profits and gains, if any, of the business or profession in the assessment year 1998-99.

The High Court therefore answered both the question in the negative and in favour of the Revenue.

On further appeal, the Supreme Court dismissed the SLP subject to the observation that the unabsorbed depreciation as on April 1, 1997, can be set off against the income from any head for the immediate assessment year following April 1, 1997 and thereafter if there still is any unabsorbed depreciation the same can be set off only against the business income for a period of eight assessment years.

Depreciation – Plant – Pond specifically designed for rearing/breeding of the prawns had to be treated as tools of business of the assessee and the depreciation was admissible on these ponds. Judicial Discipline – Division Bench bound by a decision of a co-ordinate Bench – In case of different view, must refer the matter to a larger Bench

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ACIT vs. Victory Aqua Farm Ltd. (2015) 379 ITR 335 (SC)

The
question of law that fell for consideration before the Supreme Court
was as to whether ‘natural pond’ which as per the assessee was specially
designed for rearing prawns would be treated as ‘plant’ within section
32 of the Act for the purposes of allowing depreciation thereon. The
Supreme Court, at the outset, noted that one Division Bench of the High
Court of Kerala in the case of the same assessee (271 ITR 528) had on
earlier occasion decided the aforesaid question in the negative holding
that it is not a ‘plant’. However, another Division Bench by the
impugned judgment dated 14.10.2014, (271 ITR 530) even after noticing
the earlier judgment, had not agreed with the earlier opinion and has
rendered contrary decision.

The Supreme Court, therefore, was
constrained to remark that the Division Bench which has given the
impugned judgment dated 14.10.2004 should have referred the matter to a
larger Bench as otherwise it was bound by the earlier judgment of the
coordinate Bench.

However, since appeals were filed against both
the judgments and the validity of the judgment rendered in the first
case was also questioned by the assessee, the Supreme Court was of the
view that it was necessary to decide these appeals on merits, rather
than remanding the case back to the High Court to be considered by a
larger Bench.

The Supreme Court noted that the assessee was a
company doing business of ‘Aqua Culture’. It grew prawns in specially
designed ponds. In the income tax returns filed by the assessee, the
assessee had claimed depreciation in respect of these ponds by raising a
plea that these prawn ponds were tools to the business of the assessee
and, therefore, they constituted ‘plant’ within the meaning of section
32 of the Act. The Assessing Officer disallowed the claim of the
assessee. The two Benches of the High Court took contrary views. The
Supreme Court observed that it was not in dispute that if these ponds
were ‘plants’, then they were eligible for depreciation at the rates
applicable to plant and machinery and case would be covered by the
provisions of section 32 of the Act.

According to the Supreme
Court, it was not even necessary to deal with this aspect in detail with
reference to the various judgments, inasmuch as the Supreme Court in
Commissioner of Income Tax, Karnataka vs. Karnataka Power Corporation
[247 ITR 268] had held that the building which could not be separated
from the machinery and the machinery could not work, without such
special construction had to be treated as plant.

The Supreme
Court recorded that an attempt was made by the learned counsel for the
Revenue to the effect that the pond in question was natural and not
constructed/ specially designed by the assessee. According to the
Supreme Court, it was not so. In the judgment dated 14.10.2004 of the
High Court, which had decided in favour of the assessee, the High Court
had specifically mentioned that the prawns were grown in specially
designed ponds. Further, this very contention that these were natural
ponds had been specifically rejected as not correct. Moreover, from the
order passed by the Assessing Officer, the Supreme Court found that this
was not the reason given by the Assessing Officer to reject the claim.
Therefore, finding of fact on this aspect could not be gone into at this
stage. According to the Supreme Court, the judgment dated 14.10.2004
rightly rested this case on ‘functional test’ and since the ponds were
specially designed for rearing/breeding of the prawns, they had to be
treated as tools of the business of the assessee and the depreciation
was admissible on these ponds. The Supreme Court, therefore, decided the
question in favour of the assessee and as a consequence, appeals of the
Revenue were dismissed and that of the assessee are allowed.

Income – Accrual – As the amounts of interest earned on the share application money to the extent to which it is not required for being paid to the applicants to whom moneys have become refundable by reason of delay in making the refund will belong to the company, only when the trust (in favour of the general body of the applicants) terminates and it is only at that point of time, it can be stated that amount has accrued to the company as its income.

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CIT vs. Henkel Spic India Ltd. (2015) 379 ITR 322(SC)

The assessee, a public limited company, came out with a public issue of shares on January 29, 1992, and the issue was closed on February 3, 1992. The application money received by the company was deposited with collecting banks or the bankers of the company, to which the amounts were transferred for 46 days. The interest earned on such deposits was sought to be taxed by the Assessing Officer as income for the assessment year 1992-93. The assessee’s contention was that the application money which had been received from the applicants for the allotment of shares was required to be and was kept in a separate bank account as required by section 73(3) of the Companies Act and that the interest earned on those moneys could not have been treated as income accrued to the company even before the allotment process was completed. The allotment process was completed only in the following assessment year after receipt of approval for listing the company’s share in Madras, Delhi, Ahmedabad and Bombay Stock Exchanges such approvals having been received on April 27, 1992, May 8, 1992 and July 6, 1992 respectively.

The Assessing Officer, though he had some doubt as to when the interest was credited to the account whether before or after March 31, 1992, counted the period of 46 days from the date of deposit and on that basis, held that the amount of interest accrued for the period prior to March 31, 1992, was liable to be taxed under the head, “Income from other sources” as the assessee had not commenced business in that year.

On appeal, the Commissioner of Income-tax (Appeals) concurred with the view of the Assessing Officer and held that the interest that had accrued on the application money which had been kept in short-term deposits belonged to the assessee and was liable to be taxed in the hands of the assessee on the basis of accrual. The Tribunal, on further appeal by the assessee, upheld the assessee’s view and set aside the orders of the Commissioner as also the Assessing Officer.

On appeal by the Revenue, the High Court held that the company is not, u/s. 73, required to keep the money in a bank account which yields interest. There is, however, no prohibition in sub-section (3) or sub-section (3A) of section 73 against the money being kept in a bank account which yields interest. The interest so earned, however, cannot be regarded as an amount which is fully available to the company for its own use from the time the interest accrued, as that interest is an amount which accrues on a fund which itself is held in trust until the allotment is completed and moneys are returned to those to whom shares are not allotted. No part of this fund, either principal or interest accrued thereon, can be utilised by the company until the allotment process is completed and money repayable to those entitled to repayment has been repaid in full together with such interest as may be prescribed having regard to the length of period of delay in the return of money to them. It is only after the allotment process is completed and all moneys payable to those to whom moneys are refundable are refunded together with interest wherever interest becomes payable, the balance remaining from and out of the interest earned on the application money can be regarded as belonging to the company. The application money as also interest earned thereon will remain within a trust in favour of the general body of the applicants until the process outlined above is completed in all respects. The prohibition contained in sub-section (3A) of section 73 against the moneys standing to the credit in a separate bank account being utilised for purposes other than those mentioned in that sub-section, is absolute and the interest earned on the amounts in such separate bank account will remain a part of that separate bank account and cannot be transferred to any other account. As the amounts of interest earned on the application money to the extent to which it is not required for being paid to the applicants to whom moneys have become refundable by reason of delay in making the refund will belong to the company only when the trust terminates and it is only at that point of time, it can be stated that amount has accrued to the company as its income.

On further appeal, the Supreme Court noted that it was not in dispute that in the year 1993-94, the assessee had shown the income on account of interest received in the income tax returns and paid the tax thereon. The Supreme Court held that there was no error in the order passed by the High Court holding that the interest income accrued only in the assessment year 1993-94 and was taxable in that year only and not in the assessment year 1992-93. The Supreme Court accordingly dismissed the appeal.

Business Income- Remission or Cessation of Trading Liability – Settlement of deferred Salestax liability by an immediate one-time payment to SICOM – Sales-tax Authorities declining to grant credit of payment made to SICOM – No remission or cessation of liability – Section 41(1) (a) not attracted.

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CIT vs. S.I. Group India Ltd. (2015) 379 ITR 326 (SC)

The assessee had an industrial unit in the district of Raigad which was a notified backward area. The Government of Maharashtra issued a package scheme of incentives in 1993 by which a scheme for the deferral of sales tax dues was announced. The assessee had during the period May 1, 1999 and March 31, 2000 collected an amount of Rs.1,79,68,846 towards sales tax. Under the scheme, the amount was payable in five annual installments commencing from April 2010 and the liability was treated as an unsecured loan in the books of account of the assessee. The State Industrial and Investment Corporation of Maharashtra Limited (SICOM) offered to the assessee an option for the settlement of the deferred sales tax liability by an immediate one-time payment. The assessee paid an amount of Rs.50,44,280 to SICOM which, according to the assessee, represented by net present value as determined by SICOM. Payment was made by the assessee to SICOM on June 26, 2000. The difference between the deferred sales tax and its present value amounting to Rs.1.29 crore was treated as a capital receipt and was credited in the books of the assessee to the capital reserve account.

The Assessing Officer in the assessment order for the assessment year 2000-01 brought the aforesaid difference of Rs.1.29 crore to tax u/s. 41(1) of the Incometax Act 1961. The appeal filed by the assessee before the Commissioner (Appeals) for 2000-01 as well as the appeal for 2001-02 came to be dismissed by the appellate authority. The Tribunal dismissed the appeals filed by the assessee for these two assessment years by a common order. The assessee then moved the Tribunal in a miscellaneous application u/s. 254 which was dismissed.

The main contention of the assessee before the High Court was that the principal requirement for the applicability of section 41 of the Act is that the assessee must obtain a benefit in respect of a trading liability by way of a remission or cessation thereof. He argued that in the present case, there was no cessation of the liability of the assessee in respect of the payment of the sales tax dues and even if there was such a cessatioin, no benefit was obtained by the assessee. This contention was supported by the fact that the issue pertaining to the sales tax liability was decided by the Sales Tax Tribunal by its judgment dated February 8, 2008, and the Tribunal had specifically upheld the decision of the assessing authorities declining to grant credit to the assessee of payment which was made to State Industrial and Investment Corporation of Maharashtra Limited (SICOM) of Maharashtra. This contention is accepted by the High Court holding that the net result of the order of the Sales Tax Tribunal dated February 8, 2008, was to uphold the decision of the assessing authority declining to grant credit of the payment made by the assessee to SICOM towards discharge of the deferred sales tax liability. As a matter of fact, on July 22, 2008, a notice of demand was issued under section 38 of the Bombay Sales Tax Act of 1959 to the assessee by the Deputy Commissioner of Sales Tax, Navi Mumbai in the total amount of Rs.1,33,13,555. Having regard both to the order passed by the Sales Tax Tribunal on February 8, 2008, and the notice of demand issued on July 22, 2008, it was not possible for the court to accept the contention that there was a remission or cessation of liability. Since the record before the court did not disclose that there was a remission or cessation of liability, one of the requirements spelt out for the applicability of section 41(1)(a) had not been fulfilled in the facts of the present case.

According to the Supreme Court, the aforesaid facts, clearly demonstrated that the assessee had not been granted the benefit of the said cession for the assessment years in question. According to the Supreme Court, the High Court had rightly held that one of the requirements for the applicability of section 41(1)(a) of the Act had not been fulfilled in the present case.

The Supreme Court did not find any error in the order of the High Court and the appeals were accordingly dismissed.

Advance Tax – Interest – Under the provisions of section 234B, the moment an assessee who is liable to pay advance tax has failed to pay such tax or where the advance tax paid by such an assessee is less than 90 per cent of the assessed tax, the assessee becomes liable to pay simple interest at the rate of one per cent for every month or part of the month – Form No.ITNS150 which is a form for determination of tax payable including interest is to be treated as a part of the assessment order.

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CIT vs. Bhagat Construction Co. Pvt. Ltd.. [2016] 383 ITR 9 (SC)

The
Supreme Court noted that on the facts of the case, it was an admitted
position that the assessment order dated March 29, 1995 of the Assistant
Commissioner of Income –Tax , New Delhi, did not not contain any
direction for the payment of interest. The appellate order merely stated
that interest was payable u/s. 234B of the Income-tax Act, 1961. In the
first round, before the Income-tax Appellate Tribunal, the Income-tax
Appellate Tribunal’s attention was not drawn to the payment of interest
at all.

On an application made, the Income-tax Appellate
Tribunal by its order dated November 12, 2002, specifically held that
since no direction had actually been given in the assessment order for
payment of interest, the assessee’s case would be covered by the
decision of the Supreme Court reported in CIT vs. Ranchi Club Ltd.
[2001] 247 ITR 209 (SC).

In an appeal to the High Court of Delhi
u/s. 260A of the Act, the impugned judgment dated July 23, 2003 merely
reiterated that the issue involved in the appeal had been decided by the
judgment in CIT vs. Ranchi Club Ltd. [2001] 247 ITR 209 (SC) referred
to above.

Before the Supreme Court the Revenue relied upon the
decision in Kalyankumar Ray vs. CIT (1991) 191 ITR 634 (SC) to contend
that the interest u/s. 234B is, in any case, part of Form I.T.N.S. 150
which is not only signed by the Assessing Officer but is really part of
the assessment order itself. It was submitted that the judgment in
Ranchi Club Ltd.’s case (supra) was distinguishable inasmuch as it arose
only in a writ petition and arose in the context of best judgment
assessment whereas on the facts of the present case, there was a
shortfall of advance tax that was paid, which, therefore, led to the
automatic levy of interest u/s. 234B. In addition, it was argued that
not only was section 234B a provision which was parasitic in nature, in
that, it applied the moment there was shortfall of advance tax or income
tax payable under the Act but that it was compensatory in nature.
Countering this submission, the counsel appearing for the respondent
assessee, supported the judgment of the Income-tax Appellate Tribunal
and the High Court by stating that the judgment in Ranchi Club Ltd.’s
case (supra) squarely covered the facts of this case.

According
to the Supreme Court, there was no need to go into the various
submissions made by Revenue as the appeal could be disposed of on a
short ground. The Supreme Court noted that In a three-judges Bench
decision, viz., Kalyankumar Ray v. CIT (supra) it took note of a similar
submission made by the assessee in that case and repelled it as
follows:

“In this context, one may take notice of the fact that
initially, rule 15(2) of the Income-tax Rules prescribed Form 8, a sheet
containing the computation of the tax, though there was no form
prescribed for the assessment of the income. This sub-rule was dropped
in 1964. Thereafter, the matter had been governed by Departmental
instructions. Under these, two forms are in vogue. One is the form of,
what is described as, the ‘assessment order’, (I.T. 30 or I.T. N.S. 65).
The other is what is described the ‘Income Tax Computation Form’ or
‘Form for Assessment or Tax/Refund’ (I.T.N.S. 150). The practice is that
after the ‘assessment order’ is made by the Income-tax Officer, the tax
is calculated and the necessary columns of I.T.N.S. 150 are filled up
showing the net amount payable in respect of the assessment year. This
form is generally prepared by the staff but is checked and signed or
initialed by the Income-tax Officer and the notice of demand follows
thereafter. The statute does not in terms require the service of the
assessment order or the other form on the assessee and contemplates only
the service of a notice of demand. It seems that while the ‘assessment
order’ used to be generally sent to the assessee, the other form was
retained on file and a copy occasionally sent to the assessee. I.T.N.S.
150 is also a form for determination of tax payable and when it is
signed or initialed by the Income-tax Officer it is certainly an order
in writing by the Income-tax Officer determining the tax payable within
the meaning of section 143(3). It may be, as stated in CIT vs. Himalaya
Drug Co. [1982] 135 ITR 368 (All), is only a tax calculation form for
Departmental purposes as it also contains columns and code numbers to
facilitate computerization of the particulars contained therein for
statistical purposes but this does not detract from its being considered
as an order in writing determining the sum payable by the assessee. We
are unable to see why this document, which is also in writing and which
has received the imprimatur of the Income-tax Officer should not be
treated as part of the assessment order in the wider sense in which the
expression has to be understood in the context of section 143(3). There
is no dispute in the present case that the Income-tax Officer has signed
the form I.T.N.S. 150. We therefore, think that the statutory provision
has been duly complied with and that the assessment order was not in
any manner vitiated.”

The Supreme Court also noted that its judgment in the Ranchi Club Ltd.’s case (supra) was a one line order which merely stated:

“We
have heard learned counsel for the appellant. We find no merit in the
appeals. The civil appeals are dismissed. No order as to costs”.

The
Supreme Court observed that the High Court judgment which was affirmed
by it as aforesaid arose in the context of a challenge to the vires of
sections 234A and 234B of the Act. After repelling the challenge to the
vires of the two sections, the High Court found that interest had been
levied on tax payable after assessment and not on the tax as per the
return. Following this court’s judgment in J.K. Synthetics Ltd. vs.
Commercial Taxes Officer [1994] 94 STC 422 (SC), the High Court had held
that the assessee was not supposed to pay interest on the amount of tax
which may be assessed in a regular assessment u/s. 143(3) or best
judgment under section 144 as he was not supposed to know or anticipate
that his return of income would not be accepted. The High Court further
held that interest was payable in future only after the dues were
finally determined.

The Supreme Court further observed that
under the provisions of section 234B, the moment an assessee who is
liable to pay advance tax has failed to pay such tax or where the
advance tax paid by such an assessee is less than 90 per cent of the
assessed tax, the assessee becomes liable to pay simple interest at the
rate of one per cent for every month or part of the month.

The
Supreme Court therefore held that the counsel for the Revenue was right
in stating that levy of such interest was automatic when the conditions
of section 234B were met.

According to the Supreme Court, the
facts of the present case were squarely covered by the decision
contained in Kalyankumar Ray’s case (supra) inasmuch as it was
undisputed that Form I.T.N.S. 150 contained a calculation of interest
payable on the tax assessed. This being the case, it was clear that as
per the said judgment this Form must be treated as part of the
assessment order in the wider sense in which the expression had to be
understood in the context of section 143, which was referred to in
Explanation 1 to section 234B.

This being the case, the Supreme Court set aside the judgment of the High Court and allowed the appeal of the Revenue.

Appeal to High Court – Finding of fact arrived at by the Tribunal cannot be set aside without a specific question regarding a perverse finding of fact having been raised before the High Court. Business Expenditure – Legal expenses incurred after the take over of a partnership firm is allowable as a deduction u/s. 37. Depreciation – Plant includes intellectual property rights.

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Mangalore Ganesh Beedi Works v. CIT [2015] 378 ITR 640 (SC)

In 1939, the late Sri S. Raghuram Prabhu started the business of manufacturing beedis. He was later joined the business by Sri Madhav Shenoy as a partner and thus M/s. Mangalore Ganesh Beedi Works (for short “MGBW”) came into existence with effect from February 28, 1940.

The partnership firm was constituted from time to time and its last constitution and partnership deed contained clause 16 relating to the manner in which the affairs of the partnership firm were to be wound up after its dissolution. Clause 16 of the partnership deed reads as follows:

“16. If the partnership is dissolved, the going concern carried on under the name of the firm Mangalore Ganesh Beedi Works and all the trade marks used in course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the partner who offers and pays or two or more partners who jointly offer and pay the highest price therefore as a single group at a sale to be then held as among the partners shall be entitled to bid. The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deed, instruments and applications and otherwise and him/her name or their names of all the said trade marks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee partner or partners.”

Due to differences between the partners of MGBW, the firm was dissolved on or about December 6, 1987, when the two partners of the firm applied for its winding up by filing Company Petition No.1 of 1988 in the High Court. While entertaining the Company Petition the High Court appointed an official liquidator and eventually, after hearing all the concerned parties, a winding up order was passed on June 14, 1991.

In its order passed on June 14, 1991, the High Court held that the firm is dissolved with effect from December 6, 1987, and directed the sale of its assets as a going concern to the highest bidder amongst the partners.

Pursuant to the order passed by the High Court on June 14, 1991, an auction was conducted in which three of the erstwhile partners forming an association of persons (hereinafter referred to as “AOP-3”) emerged as the highest bidders and their bid of Rs.92 crores for the assets of MGBW was accepted by the official liquidator on or about November 17, 1994. With effect from November 18, 1994, the business of the firm passed on into the hands of AOP-3 but the tangible assets were actually handed over by the official liquidator to AOP-3 on or about January 7, 1995.

MGBW (hereinafter referred to as “the assessee”) filed its return for the assessment year 1995-96 relating to period November 18, 1994, to March 31, 1995, and, subsequently, filed a revised return. Broadly, the assessee claimed a deduction of Rs.12,24,700 as a revenue expenditure permissible u/s. 37 of the Incometax Act, 1961 (hereinafter referred to as “the Act”) towards legal expenses incurred. The assessee also claimed deduction u/ss.35A and section 35AB of the Act towards acquisition of intellectual property rights such as rights over the trade mark, copyright and technical know-how. In the alternative, the assessee claimed depreciation on capitalizing the value of the intellectual property rights by treating them as plant.

The Assessing Officer passed an order on March 30, 1998, rejecting the claim of the assessee under all the three sections mentioned above. Feeling aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) who passed an order on October 15, 1998. The appeal was allowed in part inasmuch as it was held that the assessee was entitled to a deduction towards legal expenses. However, the claim of the assessee regarding deduction or depreciation on the intellectual property rights was rejected by the Commissioner of Income-tax(Appeals).

As a result of the appellate order, the Revenue was aggrieved by the deduction granted to the assessee in respect of legal expenses and so it preferred an appeal before the Tribunal. The assessee was aggrieved by the rejection of its claim in respect of the intellectual property rights and also filed an appeal before the Tribunal.

By an order dated October 19, 2000, the Tribunal allowed the appeal of the assessee while rejecting the appeal of the Revenue.

The High Court set aside the findings of the Income-tax Appellate Tribunal (for short “the Tribunal”) and restored the order of the Assessing Officer.

The Supreme Court with regards to the claim of deduction of Rs.12,24,700/- as revenue expenditure held that there was a clear finding of fact by the Tribunal that the legal expenses incurred by the assessee were for protecting its business and that the expenses were incurred after November 18, 1994. According to the Supreme Court there was no reason to reverse this finding of fact particularly since nothing had been shown to them to conclude that the finding of fact was perverse in any manner whatsoever. That apart, if the finding of fact arrived at by the Tribunal were to be set aside, a specific question regarding a perverse finding of fact ought to have been framed by the High Court.

The Supreme Court therefore set aside the conclusion arrived at by the High Court on this question and restored the view of the Tribunal.

In so far as the question of granting depreciation on the value of trade marks, copy rights and know how was concerned, the Supreme Court noted that the fundamental basis on which these questions were decided against the assessee and in favour of the Revenue was the finding of the High Court that what was sold by way of auction to the highest bidder was the goodwill of the partnership firm and not the trade marks, copyrights and technical know-how.

According to learned counsel for the Revenue, MGBW was already the owner of the trade marks, copyrights and technical know-how and essentially the rights in the intellectual property might be included in goodwill, but these were not auctioned off but were relinquished in favour of AOP-3.

The Supreme Court observed that the trade marks were given a value since in the beedi industry the trade mark and brand name have a value and the assessee’s product under trade mark “501” had a national and international market. As far as the copyright valuation was concerned, beedis were known not only by the trade mark but also by the depiction on the labels and wrappers and colour combination on the package. The assessee had a copyright on the content of the labels, wrappers and the colour combination on them. Similarly, the know-how had a value since the aroma of beedis differ from one manufacturer to another, depending on the secret formula for mixing and blending tobacco.

The Supreme Court noted that AOP-3 had obtained a separate valuation from the chartered accountant M. R. Ramachandra Variar. In his report dated September 12, 1994, the technical know-how was valued at Rs.36 crore, copyright was valued at Rs.21.6 crore and trade marks were valued at Rs.14.4 crore making a total of Rs.72 crore.

The Supreme Court noted that in the case of M. Ramnath Shenoy (an erstwhile partner of MGBW) the Tribunal had accepted (after a detailed discussion) the contention of the assessee that trade marks, copyrights and technical know-how alone were comprised in the assets of the business and not goodwill. It was also held that when the Revenue alleges that it is goodwill and not trade marks, etc., that is transferred the onus will be on the Revenue to prove it, which it was unable to do. The Tribunal then examined the question whether the sale of these intangible assets would attract capital gains. The question was answered in the negative and it was held that the assets were self-generated and would not attract capital gains. The decision of the Tribunal was accepted by the Revenue and therefore according to the Supreme Court there was no reason why a different conclusion should be arrived at in so far as the assessee was concerned.

The Supreme Court observed that the High Court denied any benefit to the assessee u/ss 35A and 35AB of the Act since it was held that what was auctioned off was only goodwill and no amount was spent by AOP-3 towards acquisition of trade marks, copyrights and know-how. In coming to this conclusion, reliance was placed in the report of the chartered accountants Rao and Swamy who stated that the assets of MGBW were those of a going concern and were valued on the goodwill of the firm and no trade marks, copyrights and know-how were acquired. According to the Supreme Court, the High Court rather speculatively held that the valuation made by the chartered accountant of AOP-3 that is M. R. Ramachandra Variar that the goodwill was split into know-how, copyrights and trade marks only for the purposes of claiming a deduction u/ss 35A and 35AB of the Act and the value of the goodwill was shown as nil and the deduction claimed did not represent the value of the know-how, copyrights and trade marks.

The Supreme Court however left open the question of the applicability of sections 35A and 35AB of the Act for an appropriate case. This was because learned counsel submitted that if the assessee was given the benefit of section 32 read with section 43(3) of the Act (depreciation on plant) as had been done by the Tribunal, the assessee would be quite satisfied. The Supreme Court observed that unfortunately, this alternative aspect of the assessee’s case was not looked into by the High Court. Therefore, according to the Supreme Court now the question to be answered was whether the assessee was entitled to any benefit u/s. 32 of the Act read with section 43(3) thereof for the expenditure incurred on the acquisition of trade marks, copyrights and know-how.

The Supreme Court noted that the definition of “plant” in section 43(3) of the Act was inclusive. A similar definition occurring in section 10(5) of the Income-tax Act, 1922 was considered in CIT vs. Taj Mahal Hotel wherein it was held that the word “plant” must be given a wide meaning. The Supreme Court held that for the purposes of a large business, control over intellectual property rights such as brand name, trade mark, etc., are absolutely necessary. Moreover, the acquisition of such rights and know-how is acquisition of a capital nature, more particularly in the case of the assessee. Therefore, it could not be doubted that so far as the assessee was concerned, the trade marks, copyrights and know-how acquired by it would come within the definition of “plant” being commercially necessary and essential as understood by those dealing with direct taxes. The Supreme Court noted that section 32, as it stood at the relevant time did not make any distinction between tangible and intangible assets for the purposes of depreciation.

In this context, the Supreme Court observed that by denying that the trade marks were auctioned to the highest bidder, the Revenue is actually seeking to re-write clause 16 of the agreement between the erstwhile partners of MGBW. This clause specifically states that the going concern and all the trademarks used in the course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the highest bidder. Under the circumstances, it was difficult to appreciate how it could be concluded by the Revenue that the trade marks were not auctioned off and only the goodwill in the erstwhile firm was auctioned off. The Supreme Court restored the order of the Tribunal directing the Assessing Officer to capitalise the value of trade marks, copyrights and technical know-how by treating the same as plant and machinery and to grant depreciation thereon.

Recovery of Tax – Stay of Demand – Subsequent events should be taken into consideration.

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Sidhi Vinayak Metcom Ltd. vs. UOI [2015] 378 ITR 372 (SC)

The assessment in respect of the assessment years 2010-11 and 2011-12 was reopened by the Income-tax Department by issuing notice u/s. 148. Assessments for these years were carried out afresh by the Assessing Officer imposing an additional tax demand of Rs.64 lakhs. The Petitioner had filed appeals against the said order which were pending before the Commissioner of Income-tax (Appeals). The Petitioner also moved an application for stay of the demand. On this, application, the Commissioner of Income-tax (Appeals) passed orders granting stay of interest and in respect of the tax amount, the petitioner was permitted to deposit the same in 16 installments. However, the Petitioner committed default in making payment of the very first installment because of which the bank account of the Petitioner was attached. The order was challenged by filing a writ petition in the High Court which was dismissed.

Before the Supreme Court it was pointed out that up to now the Petitioner had paid a sum of Rs.27.7 lakh in all. It was also pointed out by the learned counsel for the Petitioner that the main reason for reopening of the assessment for the aforesaid years by issuance of notice u/s. 148 was certain proceedings under the Central Excise Act. A copy of the decision dated September 16, 2015, paused by the Customs, Excise and Service Tax Appellate Tribunal was filed before the Supreme Court by way of additional document, revealing that in appeal against the Order-in- Original of the Excise Department, the CESTAT had set aside the said order and remitted the case back to the adjudicating authority for fresh adjudication.

According to the Supreme Court, in view of the aforesaid subsequent event, it would be appropriate if the petitioner approached the Commissioner of Income-tax (Appeals) once again with an application for stay bringing the aforesaid events to the notice of the Commissioner of Income-tax (Appeals). The Supreme Court was confidant that the Commissioner of Income-tax (Appeals) would consider the application on its own merits and pass orders thereon within a period of four weeks from the date of filing the application. The Supreme Court disposed the special leave petition accordingly.

Business Income – Special Deduction – Proceeds generated from sale of scrap not includable in “Total turnover” for the determining the admissible deduction u/s. 80HHC.

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Mahavira Cycle Industries vs. CIT & Anr. [2015] 379 ITR 357 (SC)

The assessee-firm was dealing in trading and manufacturing of cycle parts. It claimed that the scrap was bi-product of manufacturing which was not part of the total turnover. On November 29, 1999, the assessee filed its original return for the assessment year 1999-2000 declaring a total income as nil. The assessee claimed deduction of Rs.1,73,53,957 u/s. 80HHC of the Act. The return was processed u/s. 143(1)(a) on March 21, 2001. The case was reopened u/s. 148 of the Act. During the assessment proceedings, it was found that the assessee had made sale of scrap amounting to Rs.79,25,489. According to the view point of the Revenue, the sale proceeds of the scrap was a part of the total turnover though the assessee had ignored to include the amount of sale of scrap while computing the deduction u/s. 80HHC of the Act. At the same time, the Assessing Office excluded the profit on sale of scrap from the profit of the business on proportionate basis for the purposes of calculation of deduction u/s. 80HHC. The Assessing Officer, thus, vide order dated July 10, 2006, modified the deduction admissible u/s. 80HHC.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals) (for short “the CIT(A)”). The Commissioner of Income Tax (Appeals) held that the Assessing Officer fell in legal error by including the sale of scrap in the total turnover for the purpose of computation of deduction u/s. 80HHC. It was also clarified that the sale of scrap shall not be considered while computing the profits of the business and, accordingly, by its order dated September 25, 2006, the Commissioner of Income Tax (Appeals) allowed the appeal.

The order giving effect to the order of the Commissioner of Income Tax (Appeals) was passed on October 3, 2006 by the Assessing Officer wherein the total income was assessed at nil. However, later on the Assessing Officer was of the opinion that while giving effect to the order of the Commissioner of Income Tax (Appeals), a mistake apparent on the face of the record had occurred as the scrap sales amounting to Rs.79,25,489 had to be excluded from the total turnover as well as from the profits of the business for computing deduction u/s. 80HHC. The Assessing Officer rectified its earlier order giving appeal effect by exercise of the powers under section 154 of the Act, vide order dated November 28, 2006 and recomputed the deduction by excluding the entire turnover of sale of scrap from the profits of the business. The assessee again filed an appeal before the Commissioner of Income Tax (Appeals) challenging the order dated November 28, 2006 of the Assessing Officer. The Commissioner of Income Tax (Appeals), however, dismissed the appeal, vide order dated December 28, 2007, in the light of its earlier order dated September 25, 2006, holding that u/s.154 the Assessing Officer was competent to initiate proceedings to exclude the turnover of sale of scrap from the profit of business for the purpose of computation of deduction u/s. 80HHC. The assessee further took the matter in appeal before the Tribunal, impugning the orders passed by the Commissioner of Income Tax (Appeals) dated December 28, 2007, and September 25, 2006. The main submission that was raised on behalf of the assessee was that the Commissioner of Income Tax (Appeals) had erred in holding that the entire turnover of sale of scrap was to be excluded from profits of business while computing the deduction u/s. 80HHC.

The Tribunal vide order dated September 29, 2008, held that the deduction u/s. 80HHC of the Act should be computed after excluding the profit on sale of scrap from the profit of business and the sale of scrap also would not form part of the total turnover, for the purpose of calculation of deduction u/s. 80HHC and dismissed both the appeals of the assessee.

The High Court held that the question regarding the inclusion of profit on sale of scrap in calculating business profit u/s. 80HHC had come up for consideration before the Kerala High Court in CIT vs. Kar Mobiles Ltd.’s case (311 ITR 478) where after examining the provisions of section 80HHC and Explanation (baa)(1) attached thereto, it was held that the profits arising from the sale of scrap shall form part of business profits referred to in the formula for determining admissible deduction u/s. 80HHC of the Act. It was also recorded that the sale of scrap shall also form part of the total turnover of the assessee.

Before the Supreme Court, the Revenue acknowledged that the controversy in hand has been adjudicated upon by the Supreme Court in CIT vs. Punjab Stainless Steel Industries (364 ITR 144), in which it was held that sale proceeds of scrap were not includible in turnover.

The Supreme Court therefore allowed the application of the assessee and disposed of the civil appeals in terms of the judgment in CIT vs. Punjab Stainless Steel Industries.

Penalty u/s. 271E -When the original assessment is set aside, the satisfaction recorded therein for the purpose of initiation of penalty proceeding would not survive – Penalty imposed on the basis of original order cannot be sustained.

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CIT vs. Jai Laxmi Rice Mills (2015) 379 ITR 521 (SC)

In respect of the assessment year 1992-93, assessment order was passed on February 26,1996, on the basis of the CIB information informing the Department that the assessee was engaged in a large scale purchase and sale of wheat but it was not filing income–tax return. Ex parte proceedings were initiated, which resulted in the aforesaid order, as per which the net taxable income of the assessee was assessed at Rs. 18,34,584. While framing the assessment, the Assessing Officer also observed that the assessee had contravened the provisions of section 269SS of the Act and because of this, the Assessing Officer was satisfied that penalty proceedings u/s. 271E of the Act were to be initiated.

The assessee carried out this order in appeal. The Commissioner of Income-tax (Appeals) allowed the appeal and set aside the assessment order with a direction to frame the assessment de novo after affording adequate opportunity to the assessee.

After remand, the Assessing Officer passed a fresh assessment order. In this assessment order, however, no satisfaction regarding initiation of penalty proceedings u/s. 271E of the Act was recorded.

It so happened that on the basis of the original assessment order dated February 26, 1996, show-cause notice was given to the assessee and it resulted in passing the penalty order dated September 23, 1996. Thus, this penalty order was passed before the appeal of the assessee against the original assessment order was heard and allowed thereby setting aside the assessment order itself. It is in this backdrop, a question arose as to whether the penalty order, which was passed on the basis of the original assessment order and when that assessment order had been set aside, could still survive.

The Tribunal as well as the High Court held that it could not be so for the simple reason that when the original assessment order itself was set aside, the satisfaction recorded therein for the purpose of initiation of the penalty proceeding u/s. 271E would also would not survive. According to Supreme Court this was the correct proposition of law stated by the High Court in the impugned order.

The Supreme Court observed that, in so far as the fresh assessment order was concerned, there was no satisfaction recorded regarding the penalty proceeding u/s. 271E of the Act though in that order the Assessing Officer wanted penalty proceeding to be initiated u/s. 271(1)(c) of the Act. The Supreme Court thus held that in so far as penalty u/s. 271E was concerned, it was without any satisfaction and, therefore, no such penalty could be levied. The Supreme Court accordingly dismissed the appeals filed by the Revenue.

Business Expenditure – Interest on borrowed capital cannot be disallowed in a case where advances are made to subsidiary out of such borrowed capital due to business expediency.

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Hero Cycle P. Ltd. vs. CIT (2015) 379 ITR 347( SC)

In the income-tax return filed by the assessee for the aforesaid assessment year, the assessee, inter alia, claimed deduction of interest paid on borrowed sums from bank under the privisions of section 36(1)(iii) (hereinafter referred to as “the Act”). The aforesaid deduction was disallowed by the Assessing Officer, vide his assessment order dated March 26, 1991, on the following two points:

(1) The assessee had advanced a sum of Rs. 1,16,26,128 to its subsidiary company known as M/s. Hero Fibres Ltd. and this advance did not carry any interest. According to the Assessing Officer, the assessee had borrowed the money from the banks and paid interest thereupon. Deduction was claimed as business expenditure but substantial money out of the loans taken from the bank was diverted by giving advance to M/s. Hero Fibres Ltd. on which no interest was charged by the assessee. Therefore, he concluded that the money borrowed on which interest was paid was not for business purposes and no deduction could be allowed.

(2) In addition, the assessee had also given advances to its directors in the sum of Rs. 34 lakh on which the assessee charged from those directors interest at the rate of 10%, whereas interest payable on the money taken by way of loans by the assessee from the banks carried interest at the rate of 18%. On that basis, the Assessing Officer held that charging of interest at the rate of 10% from the abovementioned persons and paying interest at much more rate, i.e., at the rate of 18% on the money borrowed by the assessee could not be treated for the purposes of business of the assessee.

The assessee had claimed deduction of interest in the sum of Rs. 20,53,120. The Assessing Officer, after recording the aforesaid reasons, did not allow the deduction of the entire amount and re-calculated the figures, thereby disallowed the aforesaid claim to the extent of Rs. 16,39,010.

The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals).

In so far as the advance given to M/s. Hero Fibres Ltd. was concerned, the case put up by the assessee even before the Assessing Officer was that it had given an undertaking to the financial institutions to provide M/s. Hero Fibres Ltd. the additional margin to meet the working capital for meeting any cash losses. It was further explained that the assessee-company was the promoter of M/s. Hero Fibres Ltd. and since it had the controlling share in the said company that necessitated giving of such an undertaking to the financial institutions. The amount was, thus, advanced in compliance with the stipulation laid down by the three financial institutions under a loan agreement which was entered into between M/s. Hero Fibres Ltd. and the said financial institutions and it became possible for the financial institutions to advance that loan to M/s. Hero Fibres Ltd., because of the aforesaid undertaking given by the assessee. No interest was to be paid on this loan unless dividend was paid by that company.

On that basis, it was argued that the amount was advanced by way of business expediency. The Commissioner of Income-tax (Appeals) accepted the aforesaid plea of the assessee.

In so far as the loan given to its own directors at the rate of 10 % was concerned, the explanation of the assessee was that this loan was never given out of any borrowed funds. The assessee had demonstrated that on the date when the loan was given, that is on March 25,1987, to these directors, there was a credit balance in the account of the assessee from where the loan was given. It was demonstrated that even after the encashment of the cheques of Rs. 34 lakh in favour of those directors by way of loan, there was a credit balance of Rs. 4,95,670 in the said bank account. The aforesaid explanation was also accepted by the Commissioner of Income-tax (Appeals) arriving at a finding of fact that the loan given to the directors was not from the borrowed funds. Therefore, the interest liability of the assessee towards the bank on the borrowing, which was taken by the assessee had no bearings because otherwise, the assessee had sufficient funds of its own which the assesse could have advanced and it was for the Assessing Officer to establish the nexus between the borrowings and advancing to prove that the expenditure was for non-business purposes which the Assessing Officer failed to do.

The Revenue challenged the order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal upheld the aforesaid view of the Commissioner of Income-tax (Appeals) and, thus, dismissed the appeal preferred by the Revenue.

The appeal of the Revenue before the High Court filed u/s. 260A of the Income-tax Act, however, was allowed by the High Court, by simply following its own judgment in the case of CIT vs. Abhishek Industries Ltd. (286 ITR 1).

The Supreme court applying the ratio of its decision in S. A. Builders vs. CIT (288 ITR 1) to the facts of this case and referring to the decision of the Delhi High Court in CIT vs. Dalmia Cement (B) Ltd. (254 ITR 377) which was approved in S. A. Builders (supra), held that it was manifest that the advance to M/s. Hero Fibres Ltd. became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to meet working capital for cash losses.

The Supreme Court noted that, subsequently, the assessee-company had off-loaded its shareholding in the said M/s. Hero Fibres Ltd. to various companies of the Oswal group and at that time, the assessee-company not only got the back the entire loan given to M/s. Hero Fibres Ltd. but this was refunded with interest. In the year in which the aforesaid interest was received, the same was shown as income and offered to tax.

In so far as the loans to the directors was concerned, the Supreme Court observed that it could not be disputed by the Revenue that the assessee had a credit balance in the bank account when the said advance of Rs. 34 lakh was given. Further, as observed by the Commissioner of Income-tax (Appeals) in his order, the company had reserve/surplus to the tune of almost 15 crore and, therefore, the assessee-company could in any case, utilise those funds for giving advance to its directors.

In view of above, the Supreme Court allowed the appeal thereby setting aside the order of the High Court and restoring that of the Income-tax Appellate Tribunal.

Note:- The judgment of the Apex Court in the case of S. A. Builders was analysed in the column ‘ Closements’ of BCAJ in the month of February, 2007.

Penalty –Assessee having already paid tax and interest u/s. 201 (1) and (1A) so as to end the dispute with the Revenue, the deletion of penalty levied u/s. 271C did not give rise to any substantial question of law.

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CIT vs. Bank of Nova Scotia [2016] 380 ITR 550 (SC)

The Tribunal after noting the case of the assessee that it had already paid the tax and interest u/s. 201(1) and (1A) so as to end the dispute with Revenue deleted the penalty levied u/s. 271C following the decision of Delhi High Court in CIT vs. Itochu Corporation [2004] 268 ITR 172 (Del) and CIT vs. Mitsui and Co. Ltd. [2005] 272 ITR 545 (Del).

The High Court rejected the appeal of the Revenue on the ground that no substantial question of law, arose in the matter.

On further appeal, Supreme Court dismissed the appeal of the Revenue holding that there was no substantial question of law, the facts and law having properly and correctly been assessed and appreciated by the Commissioner of Income-tax (Appeals) as well as by the Income- Tax Appellate Tribunal.

Deduction of tax at source – Rent – Definition – Landing and parking charges paid by Airlines to Airports Authority of India are not for the use of the land but are charges for services and facilities offered in connection with the aircraft operation at the airport and hence could not be treated as “rent” within the meaning of section 194-I

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Japan Airlines Co. Ltd. vs. CIT (Civil Appeal No.9875 of 2013) CIT vs. Singapore Airlines Ltd. (Civil Appeal No.9876 – 9881 of 2013) [2015] 377 ITR 372 (SC)

The International Civil Aviation Organization (“ICAO”) to which India is also a Contracting State has framed certain guidelines and rules which are contained in the Airports Economic Manual and ICAO’s Policies on Charges for Airports and Air Navigation Services. All member States abide by the guidelines and rules prescribed for various charges to be levied for facilities and services provided including landing/parking charges.

The Airports Authority of India (AAI) under the provisions of the Airport Authority of India Act, 1994, has been authorised to fix and collect charges for landing, parking of aircrafts and any other services and facilities offered in connection with aircraft operations at airport and for providing air traffic services such as ground safety services, aeronautical communications and navigational aides, meteorological services and others at the airport.

Japan Airlines Ltd. (JAL), a foreign company incorporated in Japan is engaged in the business of international air traffic. It transports passengers and cargo by air across the globe and provides other related services. JAL is a member of the International Air Transport Agreement (“IATA”) and during the financial year 1997- 98 (assessment year 1998-99) it serviced inward and outbound air traffic to and from New Delhi, India. The AAI levied certain charges on the JAL for landing and also for parking its aircrafts. JAL paid the charges after deducting tax at source u/s. 194C of the Act. The JAL received letter dated 2nd August, 1996, from the AAI informing it that the AAI had applied to the income-tax authorities for exemption from the tax deduction and were awaiting the clearance. It was further stated in the said letter that in the meanwhile JAL should deduct the tax on landing and parking charges at 2 % u/s. 194C. JAL, accordingly started making TDS at 2 %. In the relevant assessment year, it paid the AAI a sum of Rs.61,60,486 towards landing and parking charges. On this amount, TDS comes to Rs.1,57,082 when calculated at 2 % which was deducted from the payments made to the AAI and deposited with the Revenue. The JAL thereafter filed its annual return in Form 26C for the financial year 1997-98.

The Assessing Officer passed an order under section 201(1) of the Act on 4th June, 1999, holding the JAL as an assessee-in-default for short deduction of tax of Rs.11,59,695 at source. He took the view that payments during landing and parking charges were covered by the provisions of section 194-I and not under section 194C of the Act and, therefore, the JAL ought to have deducted tax at 20 % instead of at 2 %. The JAL filed the appeal against this order before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) accepted the contention of the JAL and allowed the appeal, vide order dated 31st January, 2001, holding that landing and parking charges were inclusive of number of services in compliance with the International Protocol of the ICAO. The Revenue challenged the order of the Commissioner of Income-tax (Appeals) by filing an appeal before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal dismissed this appeal on 25th October, 2004, confirming the order of the Commissioner of Income-tax (Appeals).

The Revenue persisted with its view that the matter was covered by section 194-I and therefore, it went to the High Court by way of further appeal u/s. 260A of the Act. Two questions were raised (i) whether the Tribunal was correct in holding that the landing/parking charges paid by the JAL to the AAI were payments for a contract of work u/s. 194C and not in the nature of “rent” as defined in section 194-I; and (ii) whether the Tribunal was correct in law in holding that the JAL was not an assessee-indefault. The High Court allowed the appeal by answering the questions in favour of the respondent following its earlier decision in the case of United Airlines vs. CIT. In that case, the High Court had taken the view that the term “rent” as defined in section 194-I had a wider meaning than “rent” in the common parlance as it included any agreement or arrangement for use of land. The High Court further observed that the use of land began when the wheels of an aircraft touched the surface of the airfield and similarly, there was use of land when the aircraft was parked at the airport.

A Special Leave Petition was filed against the aforesaid judgment of the High Court in which leave was granted.

In another appeal which involved Singapore Airlines Ltd., the Commissioner of Income-tax/Revenue had filed the appeals before Supreme Court as the High Court of Madras in its judgment dated 13th July, 2012, had taken a contrary view holding that the case was covered u/s. 194C of the Act and not u/s. 194-I of the Act thereof. The Madras High Court had taken the note of the judgment of the Delhi High Court but had differed with its view.

The Supreme Court observed that the two judgements were in conflict with each other and it had to determine as to which judgment should be treated in consonance with the legal position and be allowed to hold the field. According to the Supreme Court since the main discussion in the impugned judgment rendered by the High Court of Delhi and also the High Court of Madras centered around the interpretation that is to be accorded to section 194-I of the Act, it would first discuss as to whether the case is covered by this provision or not.

The Supreme Court held that from the reading of section 194 I, it became clear that TDS is to be made on the “rent”. The expression “rent” is given much wider meaning under this provision than what is normally known in common parlance. In the first instance, it means any payments which are made under any lease, sub-lease, tenancy. Once the payment is made under lease, sublease or tenancy, the nomenclature which is given is inconsequential. Such payment under lease, sub-lease and/or tenancy would be treated as “rent”. In the second place, such a payment made even under any other “agreement or arrangement for the use of any land or any building” would also be treated as “rent”. Whether or not such building is owned by the payee is not relevant. The expressions “any payment”, by whatever name called and “any other agreement or arrangement” have the widest import. Likewise, payment made for the “use of any land or any building” widens the scope of the proviso.

The Supreme Court noted that in the present case, the airlines are allowed to land and take-off their aircrafts at IGIA for which landing fee is charged. Likewise, they are allowed to park their aircrafts at IGIA for which parking fee is charged. It is done under an agreement and/or arrangement with the AAI. The moot question therefore was as to whether landing and take-off facilities on the one hand and parking facility on the other hand, would mean “use of the land”.

The Supreme Court observed that in United Airlines’ case [287 ITR 281 (Del)], the High Court held that the word “rent” as defined in the provision has a wider meaning than “rent” in common parlance. It includes any agreement or arrangement for use of the land. In the opinion of the High Court, “when the wheels of an aircraft coming into an airport touch the surface of the airfield, use of the land of the airport immediately begins”. Similarly, for parking the aircraft in that airport, there is use of the land. This was the basic, nay, the only reason given by the High Court in support of its conclusion.

The Madras High Court, on the other hand, had a much bigger canvass before it needed to paint a clearer picture with all necessary hues and colours. Instead of taking a myopic view taken by the Delhi High Court by only considering use of the land per se, the Madras High Court examined the matter keeping wider perspective in mind thereby encompassing the utilisation of the airport providing the facility of landing and take-off of the airplanes and also the parking facility. After taking into consideration these aspects, the Madras High Court came to the conclusion that the facility was not of “use of land” per se, but the charges on landing and take-off by the AAI from these airlines were in respect of number of facilities provided by the AAI which was to be necessarily provided in compliance with the various international protocol. The charges therefore, were not for the land usage or area allotted simpliciter. These were the charges for various services provided. The substance of these charges was ingrained in the various facilities offered to meet the requirement of passengers’ safety and on safe landing and parking of the aircraft and these were the consideration that, in reality, governed by the fixation of the charges. According to the Supreme Court, the aforesaid conclusion of the High Court of Madras was justified which was based on sound rationale and reasoning.

The Supreme Court after noting the technological aspects of the runways in some detail held that the charges which were fixed by the AAI for landing and take-off services as well as for parking of aircrafts were not for the “use of the land”. That would be too simplistic an approach, ignoring other relevant details which would amply demonstrate that these charges are for services and facilities offered in connection with the aircraft operation at the airport. These services include providing of air traffic services, ground safety services, aeronautical communication facilities, installation and maintenance of navigational aids and meteorological services at the airport.

The Supreme Court concluded that the charges were not for the use of land per se, and therefore, it would not be treated as “rent” within the meaning of section 194-I of the Act.

Note: The Supreme Court, however, disagreed with the interpretation of the expression “any other agreement or arrangement for the use of land or any building” made by the Madras High Court limiting the ambit of the words “any other agreement or arrangement” by reading it ejusdem generis from the expression “lease, sub-lease or tenancy”. According to the Supreme Court, the second part was independent of the first part which gives much wider scope to the term “rent” and to that extent it agreed with the Delhi High Court that the scope of the definition of rent is very wide and not limited to what is understood as rent in common parlance.

Settlement of cases – Provision for abatement of proceedings – The Supreme Court agreed with the High Court which read down the provision of section 245HA(1)(iv) to mean that only in the event the application could not be disposed of for any reason attributable on the part of the applicant who has made an application u/s. 245C by cut-off date the proceeding would abate

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UOI vs. Star Television News Ltd. (2015) 373 ITR 528 (SC)

In all
the special leave petitions filed by the Union of India, before the
Supreme Court, the correctness of judgment dated 07.08.2009 rendered by
the Bombay High Court in a batch of writ petitions was questioned. In
those writ petitions filed by various assessees, the validity of
Sections 245 HA(1)(iv) and 245HA(3) of the Income-tax Act, 1961, as
amended by Finance Act, 2007 was challenged. The High Court, by a
detailed judgment, found the aforesaid provisions to be violative of
Article 14, etc., but at the same time, it did not invalidate these
provisions as the High Court was of the opinion that it was possible to
read down the provisions of Section 245HA(1)(iv) in particular to avoid
holding the provisions as unconstitutional. The conclusion so arrived at
was summed up in paragraph 54 of the impugned judgment, which read as
under:

“54. From the above discussion having arrived at a
conclusion that fixing the cut-off date as 31st March, 2008 was
arbitrary the provisions of Section 245HA(1)(iv) to that extent will be
also arbitrary. We have also held that it is possible to read down the
provisions of Section 245HA(1)(iv) in the manner set out earlier. This
recourse has been taken in order to avoid holding the provisions as
unconstitutional. Having so read, we would have to read section
245HA(1)(iv) to mean that in the event the application could not be
disposed of for any reasons attributable on the part of the applicant
who has made an application u/s. 245C. Consequently only such
proceedings would abate u/s. 245HA(1)(iv). Considering the above, the
Settlement Commission to consider whether the proceedings had been
delayed on account of any reasons attributable on the part of the
Applicant. If it comes to the conclusion that it was not so, then to
proceed with the application as if not abated. Respondent No.1 if
desirous of early disposal of the pending applications, to consider the
appointment of more Benches of the Settlement Commission, more so as the
Benches where there is heavy pendency like Delhi and Mumbai.”

The
Supreme Court was of the opinion that a well-considered judgment of the
High Court did not call for any interference. All these special leave
petitions and the appeals were accordingly dismissed by the Supreme
Court.

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Reassessment – Notice – There is no question of change of opinion when the return is accepted u/s. 143(1) inasmuch as while accepting the return as aforesaid no opinion is formed.

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DCIT vs. Zuari Estate Development and Investment Co. Ltd. (2015) 373 ITR 661 (SC)

The income-tax return filed by the respondent-assessee for the assessment year 1991-92 was accepted u/s. 143(1) of the Income-tax Act, 1961. After sometime, the Assessing Officer came to know that there was a sale agreement dated June 19,1984, entered into between the respondent and Bank of Maharashtra to sell a building for Rs.85,40,800 on the condition that the sale would be completed only after the five years of the agreement but before the expiration of the sixth year at the option of the purchaser and the purchaser can rescind the same at certain consideration. After the bank had paid to the assessee-company on June 20, 1984, the sum of Rs.84,47,111 being 90 % of the consideration agreed upon, the assessee put and handed over possession in part performance of the agreement of sale to the bank on June 20, 1984, itself. By letter dated June 12, 1990, in terms of clause 5 of the agreement of sale dated June 19, 1984, the bank called upon the assessee to complete the transactions and convey the property to the bank by June 18, 1990. By a letter dated June 16, 1993, the assessee confirmed that the assessee-company had put the premises in possession of the bank and that the assessee company would take all necessary steps for transfer of the said premises on or before September 30, 1993. Even after the said date, the assessee was unable to complete the transaction on the pretext that certain dispute had arisen owing to which the assessee did not complete the transaction. The assessee’s accounts for the year 1991 had disclosed the amount of Rs.84,47,112 by it as a current liability under the heading “advance against deferred sale of building”. In the course of assessment proceedings for the assessment year 1994- 95, the Assessing Officer raised a query as to why the capital gains arising on the sale of the premises should not be taxed in the assessment year 1991-92. On this basis, notice dated December 4, 1996, u/s. 143 read with section 147 of the Income-tax Act was served upon the assessee on the ground that the assessee had escaped tax chargeable on its income in the assessment year 1991-92. Challenging the validity of this notice, the respondent preferred a writ petition in the High Court of Bombay. The High Court had allowed the writ petition:

On appeal by the Revenue, the Supreme Court after going through the detailed order passed by the High Court found that the main issue which was involved in this case was not at all addressed by the High Court. A contention was taken by the appellant-Department to the effect that since the assessee’s return was accepted u/s. 143(1) of the Income-tax Act, there was no question of “change of opinion” inasmuch as while accepting the return under the aforesaid provision no opinion was formed and, therefore, on this basis, the notice issued was valid. According to the Supreme Court, this aspect was squarely covered by its judgment in Asst. CIT vs. Rajesh Jhaveri Stock Brokers Private Ltd.[2007] 291 ITR 500 (SC).

The Supreme Court thus held that the judgment of the High Court was erroneous. The Supreme Court allowed the appeal setting aside the impugned judgment of the High Court.

The Supreme Court further found that pursuant to the notice issued u/s. 143 of the Income-tax Act, the Assessing Officer had computed the income by passing the assessment order on the merits and rejecting the contention of the respondent that the aforesaid transaction did not amount to a sale in the assessment year in question. Against the assessment order, the respondent had preferred the appeal before the Commissioner of Income-tax (Appeals) which was also dismissed. Further appeal was preferred before the Income-tax Appellate Tribunal. This appeal, however, had been allowed by the Tribunal, vide order dated January 29, 2004, simply following the impugned judgment of the High Court, whereby the assessment proceedings itself were quashed. Since the Supreme Court had set aside the judgment of the High Court, as a result, the order dated January 29, 2004, passed by the Income-tax Appellate Tribunal also was set aside. The Supreme Court remitted the matter back to the Income-tax Appellate Tribunal to decide the appeal of the respondent on the merits.

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Export – Special Deduction – To avail benefit of section 80HHC, there has to be positive income from export business – section 80HHC

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Jeyar Consultant and Investment Pvt. Ltd. vs. CIT (2015) 373 ITR 87 (SC).

The appellant company was engaged in the business of export of marine products and also financial consultancy and trading in equity shares. Its total business did not consist purely of exports but included business within the country.

The Assessing Officer, while dealing with the assessment of the appellant in respect of the assessment year 1989- 90 took the view that the deduction was not allowable on the ground that there was no relationship between the assessee-company and the processors. The appellant carried the said order in appeal. The appeal against the assessment order was dismissed by the Commissioner of Income-tax (Appeals). The Appellant filed an appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal set aside the order of the Assessing Officer and came to a conclusion that the appellant was entitled to full relief u/s. 80HHC and directed the Assessing Officer to grant relief to the assessee.

On remand, the Assessing Officer passed a fresh order giving effect to the orders of the Income-tax Appellate Tribunal. While giving the effect, the Assessing Officer found that the appellate had not earned any profits from the export of marine products and in fact, from the said export business, it had suffered a loss. Therefore, according to the Assessing Officer, as per section 80AB, the deduction u/s. 80HHC could not exceed the amount of income included in the total income. He found that as the income from export of marine products business was in the negative, i.e. there was a loss, the deduction u/s. 80HHC would be nil, even when the assessee was entitled to deduction under the said provision. With this order, the second round of litigation started. The assessee challenged the order passed by the Assessing Officer before the Commissioner (Appeals) contending that the formula which was applied by the Assessing Officer was different from the formula prescribed u/s. 80HHC of the Act and it was also in direct violation of the Central Board of Direct Taxes Circular dated July 5, 1990. The Commissioner (Appeals), however, dismissed the appeal of the assessee principally on the ground that u/s. 246 of the Income-tax Act, an order of the Assessing Officer giving effect to the order of the Incometax Appellate Tribunal is not an appealable order. The assessee approached the Income-tax Appellate Tribunal questioning the validity of the orders passed by the Assessing Officer and the Commissioner (Appeals). The Income-tax Appellate Tribunal also dismissed the appeal of the assessee, and upheld the order of the Assessing Officer. Challenging the order of the Income-tax Appellate Tribunal, the assessee approached the High Court u/s. 256(2) of the Act seeking reference to it. The High Court directed the Income-tax Appellate Tribunal to frame the reference and place the same before the High Court. On this direction of the High Court, the Income-tax Appellate Tribunal referred the following question to the High Court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the deduction admissible to the assessee u/s. 80HHC is nil?”

The High Court answered this question against the assessee holding that the assessee admittedly had not earned any profits from the export of the marine products. On the other hand, it had suffered a loss. The deduction permissible u/s. 80HHC is only a deduction of the profits of the assessee from the export of the goods or merchandise. By the very terms of section 80HHC, it was clear that the assessee was not entitled to any benefit thereunder in the absence of any profits.

On further appeal by the appellant, the Supreme Court observed that there were two facets of this case which needed to be looked into. In the first instance, it had to consider as to whether the view of the High Court that the deduction was permissible u/s. 80HHC only when there are profits from the exports of the goods or merchandise was correct or it would be open to the assessee to club the income from export business as well as domestic business and even if there were losses in the export business but after setting off those against the income/ profits from the business in India, still there was net profit of the business, the benefit u/s. 80HHC would be available? The second question that would arise was as to whether the formula applied by the fora below was correct? In other words, while applying the formula, what would comprise “total turnover”?

The Supreme Court after considering its decisions in IPCA Laboratories Ltd. vs. DCIT [(2004) 260 ITR 521 (SC)] and A.M. Moosa vs. CIT [(2007) 294 ITR 1 (SC)] held that it stood settled, on the co-joint reading of the above judgments, that where there are losses in the export of one type of good (for example, self-manufactured goods) and profits from the export of other type of goods (for example trading goods) then both are to be clubbed together to arrive at net profits or losses for the purpose of applying the provisions of section 80HHC of the Act. If the net result was loss from the export business, then the deduction under the aforesaid Act is not permissible. As a fortiori, if there is net profit from the export business, after adjusting the losses from one type of export business from other type of export business, the benefit of the said provision would be granted.

The Supreme Court however noted that in both the aforesaid cases, namely, IPCA and A.M. Moosa, the Court was concerned with two business activities, both of which related to export, one from export of self manufactured goods and other in respect of trading goods, i.e., those which are manufactured by others. In other words, the court was concerned only with the income from exports.

The Supreme Court observed that in the present case, however, the fact situation was somewhat different. Here, in so far as the export business was concerned, there were losses. However, the appellate-assessee relied upon section 80HHC(3)(b), as existed at the relevant time, to contend that the profits of the business as a whole, i.e., including profits earned from the goods or merchandise within India should also be taken into consideration. In this manner, even if there were losses in the export business, but profits of indigenous business outweigh those losses and the net result was that there was profit of the business, then the deduction u/s. 80HHC should be given. The Supreme Court held that having regard to the law laid down in IPCA and A.M. Moosa, it could not agree with the appellant. From the scheme of section 80HHC, it was clear that deduction was to be provided under subsection (1) thereof which was “in respect of profits retained for export business”. Therefore, in the first instance, it had to be satisfied that there were profits from the export business. That was the prerequisite as held in IPCA and A.M. Moosa as well. S/s. (3) came into the picture only for the purpose of computation of deduction. For such an eventuality, while computing the “total turnover”, one may apply the formula stated in clause (b) of sub-section (3) of section 80HHC. However, that would not mean that even if there were losses in the export business but the profits in respect of business carried out within India were more than the export losses the benefit u/s. 80HHC would still be available. In the present case, since there were losses in the export business, the question of providing deduction u/s. 80HHC did not arise and as a consequence, there was no question of computation of any such deduction in the manner provided under s/s. (3). The Supreme Court therefore held that the view taken by the High Court was correct on the facts of this case.

With this, according to the Supreme Court there was no need to answer the second facet of the problem as the questi

Special Leave Petition – Supreme Court refused to entertain the appeal, since the tax effect was nominal and the matter was very old.

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CIT vs. Central Bank of India (2015) 373 ITR 524 (SC);
CIT vs. Dhanalakshmi Bank Ltd.(2015) 373 ITR 526 (SC);
CIT vs. Navodaya(2015) 373 ITR 637 (SC); and
CIT vs. Om Prakash Bagadia (HUF)(2015) 373 ITR 670 (SC)

The
Supreme Court refused to entertain the appeals having regard to the
fact that the tax effect was minimal leaving the question of law open.

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Interest from undisclosed sources – In case there has been a double taxation, relief must be accorded to the assessee

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Ashish Plastic Industries vs. ACIT [2015] 373 ITR 45(SC)

During the course of survey operation on the assessee, a manufacturer of PVC, excess stock of Rs.13,92,000 was found. On this basis, an addition was made in the assessment order. Before the Commissioner of Incometax (Appeals), the assessee sought to explain this difference by pointing out that sales of 32,809 kgs. of finished products made by one of the sister concerns, namely, Ashish Agro Plast P. Ltd. was wrongly shown as to be that of the assessee. On remand it was found that sales of finished product of 32,809 kgs. as shown is sales register of the sister concern tallied with impounded stock register and that the sister concern had received sales proceeds of the same through the bank accounts prior to the date of survey. It was however further found that sale of 33,682 kgs. of finished goods was nothing but unaccounted sales out of which 32,809 kgs. was made to the aforesaid sister concern. Taking this into consideration, the Commissioner of Income-tax (Appeals) upheld the addition. This order was upheld by the Tribunal and the High Court. The Supreme Court issued a notice on a Special Leave Petition being filed by the assessee limiting to the question as to whether in respect of sales of 32,809 kgs. which were shown in the stock register of Ashish Agro Plast P. Ltd., there had been double taxation. The Supreme Court remanded the case back to the Assessing Officer authority for enabling the assessee to demonstrate as to whether the sister concern had already paid tax on the aforesaid income from the aforesaid sales and directing that, if that was shown, to the extent of tax that was paid, benefit should be accorded to the assessee.

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Wealth-Tax – Company – Exemption – Building used by the assessee as factory for the purpose of its business – Not only the building must be used by the assessee but it must also be for the purpose of its business – Section 40(3)(vi) of the Finance Act, 1983

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Kapri International (P) Ltd. vs.CWT [2015] 373 ITR 50(SC)

The assessee company manufactured bed sheets on a property situated at Plot No.39, Site IV, Sahibabad. It’s own subsidiary company, namely, M/s. Dior International Pvt. Ltd., a company under the same management was doing processing work, namely, dyeing, for the assesseecompany in a part of the factory building situated at the aforesaid property. M/s Dior International Pvt. Ltd. installed its own machinery for the said job work of dyeing and that the assessee charged a sum of Rs.20,000 per month as licence fee from M/s. Dior International Pvt. Ltd. The said sum of Rs.20,000 per month charged as licence fee had been claimed by the assessee to be business income. Further, the job work undertaken by M/s. Dior International Pvt. Ltd., though done wholly for the assessee, was nonetheless charged to the assessee’s account and paid for by the assessee. The question that arose on the facts in this case was whether u/s. 40(3)(vi) of the Finance Act, 1983, “the building” was used by the assessee as a factory for the purpose of its business.

The assessing authority for the assessment year 1984- 85 held that the part of the building given to M/s. Dior International Pvt. Ltd., on licence was not being used for the assessee’s own business and, therefore, the assessee was not entitled to exemption in respect of the said part of the Sahibabad building property. On an appeal to the Commissioner of Income Tax (Appeals), agreed with the assessing authority and dismissed the appeal. In a further appeal to the Income-tax Appellate Tribunal, the Tribunal agreed with the view of the authorities below and dismissed the appeal. The High Court of Delhi agreed with the reasoning of the Tribunal.

On further appeal, the Supreme Court held that not only the property must be used by the assessee but it must also be “for the purpose of its business”. According to the Supreme Court on the property, it was clear on the facts that the assessee and M/s. Dior International Pvt. Ltd. were doing their own business and were separately assessed as such. The charging of Rs.20,000 per month as licence fee by the assessee from M/s. Dior International Pvt. Ltd. changed the complexion of the case. Once this was done, the two companies, though under the same management, were treating each other as separate entities. Also, for the job work done by M/s. Dior International Pvt. Ltd., M/s. Dior International Pvt. Ltd. was charging the assessee company and this again established that two companies preserved their individual corporate personalities so far as the present transaction was concerned. The Supreme Court dismissed the appeal, agreeing with the reasoning of the Tribunal, which had found favour with the High Court.

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Total Income – Income of minor child of assessee from admission to the benefits of partnership cannot be taxed in the hands of the assessee u/s. 64(1) (iii) even when read with Explanation 2A where income earned by the trust cannot be utilised for the benefit of the minor during its minority.

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Kapoor Chand (Deceased) vs. ACIT (2015) 376 ITR 450 (SC)

The
brother-in-law of the appellant, namely Shri Ram Niwas Agarwal had
created two trusts for the benefit of two minor children of the
appellant, Kapoor Chand. One trust known as Priti Life Trust was for the
benefit of Kumari. Priti who was aged about 7 years and the other trust
was created by the name of Anuj Family Trust for the benefit of master
Anuj, minor son of the appellant, Kapoor Chand. One of the important
terms of both the trust deeds was that income so earned by the trusts
shall not be received by two minors during their minority and will be
spent for their benefits only once they attain the majority. Another
fundamental clause in both the trust deeds was that in case any of the
beneficiaries died before attaining majority, his/ her share would be
given to the other sibling. Both these trustees became partners in the
partnership firm. The said partnership firm earned profits in the year
1980-81 and share of the two trusts was given to them.

Since
these trusts were for the benefit of two minor children of the
appellant, invoking the provisions of section 64(1) (iii) of the
Income-tax Act, 1961 (“the Act”), the Assessing Officer included the
said income in the income of the assessee and taxed it as such.

The appellant contested the assessment by filing an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) allowed the appeal holding that since the minors had no right to receive the income of the trusts till the time they were minors, the provisions of section 64(1)(iii) read with Explanation 2A of the Act would not be attracted.

The Department challenged the aforesaid order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. The Tribunal allowed the appeal and set aside the order of the Commissioner of Income-tax (Appeals).

Dissatisfied with the outcome, the appellant approached the High Court of Uttaranchal by way of an appeal filed u/s. 260A of the Act which appeal was dismissed by the High Court.

On further appeal, the Supreme Court held that it was clear from a plain reading of the aforesaid section that while computing the total income of any individual the income of a minor child of such individual from the admission of the minor to the benefits of partnership in a firm is to be included as the income of the said individual. Explanation 2A clarifies that if the minor child is a beneficiary under a trust, income arising to the trust from the membership of the trustee in a firm shall also be treated as income of the child and the provisions of sub-clause (iii) of section 64(1) shall get attracted even in that eventuality.

The Supreme Court noted that in the present case, it was clear from the facts narrated above, that two minor children of the appellant were the beneficiaries under the two trusts. The said trustees were the partners in the firm and had their shares in the income as partners in the said firm.

According to the Supreme Court, the entire controversy revolved around the question as to whether such income could be treated as income of a minor child. This controversy had arisen because of the reason that the income that had been earned by the trustees was not available to the two minor children till their attaining the age of majority.

The Supreme Court observed that this very question had come up before it in almost identical circumstances in the case of CIT vs. M. R. Doshi [1995] 211 ITR 1 (SC). The court, after taking note of some judgments of High Courts including the judgment of the High Court of Bombay in Yogindraprasad N. Mafatlal vs. CIT [1977] 109 ITR 602 (Bom) interpreted the provisions of section 64(1)(v) of the Act in the following manner (page 4 of 211 ITR):

“Section 64(1)(v) requires, in the computation of the total income of an assessee, the inclusion of such income as arises to the assessee from assets transferred, otherwise than for adequate consideration, to the extent to which the income from such assets is for the immediate or deferred benefit of, inter alia his minor children. The specific provision of the law, therefore, is that the immediate or deferred benefit should be for the benefit of a minor child. Inasmuch as in this case the deferment of the benefit is beyond the period of minority of the assessee’s three sons, since the assets are to be received by them when they attain majority, the provisions of section 64(1)(v) have no application.”

The Supreme Court held that in the present case, as pointed out above, specific stipulation which is contained in both the trust deeds is that in case of demise of any of the minors the income would accrue to the other child. Therefore, the receipt of the said income was also contingent upon the aforesaid eventuality and the two minors had not received the benefit immediately for the assessment year in question, viz., as “minor” children. Explanation was of no help to the Department. The provision that is contained in Explanation 2A is only to take care of the income even when a trust is created. It does not go further and make any provision to the effect that even when the income earned by the trust cannot be utilised for the benefit of the minor during his minority the Explanation 2A shall be attracted. There is no such stipulation in the said Explanation. Moreover, the language of section 64(1)(iii) is clear and categorical which makes the income of minor child taxable at the hands of individual. Thus, in the first instance it has to be shown that the share of income is in the hands of minor child which requirement was not satisfied in the present case.

The Supreme Court however observed that the Department was not without remedy inasmuch as the income earned by the two minors would not go untaxed. On attaining majority when the aforesaid money in the form of income is received by the two individuals it would be open to the Department to tax the income at that time. Or else, the Department could take up their cases u/s. 166 of the Act, if permissible.

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Heads of Income – Where letting of property is the business of the assessee, the income is to be assessed under the head “Income from business”

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Chennai Properties and Investments Ltd. vs. CIT (2015) 373 ITR 673 (SC)

The appellant – assessee was incorporated under the Indian Companies Act, with its main object, as stated in the memorandum of association, to acquire the properties in the city of Madras (now Chennai) and to let out those properties. The assessee had rented out such properties and the rental income received therefrom was shown as income from business in the return filed by the assessee. The Assessing Officer, however, refused to tax the same as business income. According to the Assessing Officer, since the income was received from letting out of the properties, it was in the nature of rental income. He, thus, held that it would be treated as income from house property and taxed the same accordingly under that head.

The assessee filed the appeal before the Commissioner of Income-tax (Appeals) who allowed the same holding it to be income from business and directed that it should be treated as such and taxed accordingly. Aggrieved by that order, the Department filed an appeal before the Incometax Appellate Tribunal which declined to interfere with the order of the Commissioner of Income-tax (Appeals) and dismissed the appeal. The Department approached the High Court. This appeal of the Department was allowed by the High Court, holding that the income derived by letting out of the properties would not be income from business but could be assessed only income form house property. The High Court primarily rested its decision on the basis of the judgment of the Supreme Court in East India Housing and Land Development Trust Ltd. vs. CIT [1961] 42 ITR 49 (SC) and in Sultan Brothers (P) Ltd. vs. CIT [1964] 51 ITR 353(SC).

On appeal to the Supreme Court, the Court noted that as per the memorandum of association of the appellantcompany the main object of the appellant company was to acquire and hold the properties known as “Chennai House” and “Firhaven Estate” both in Chennai and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. The entire income of the appellant company was through letting out of the aforesaid two properties namely, “Chennai House” and “Firhaven Estate”. There was no other income of the assessee except the income from letting out of these two properties.

According to the Supreme Court the judgment in Karanpura Development Co. Ltd. vs. CIT [1962] 44 ITR 362 (SC) squarely applied to the facts of the present case. In that case the position in law was summed up in following words:

“Where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned.”

The Supreme Court held that in this case, letting of the properties was in fact the business of the assessee. The assessee, therefore had rightly disclosed the income under the head “Income from business”. It could not be treated as “Income from the house property”. The Supreme Court accordingly allowed the appeal and set aside the judgment of the High Court and restored that of the Income-tax Appellate Tribunal.

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Substantial Question of Law – Appeal to High Court – High Court cannot decide the appeal without framing a question of law.

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P.A. Jose & Ors. vs. CWT (2015) 376 ITR 448 (SC)

The Revenue filed connected wealth-tax appeals against the order of the Tribunal holding that cash in hand in excess of Rs.50,000 in the hands of the assessee who were all individuals, did not form part of the asset u/s. 2(ea)(vi) of the Wealth-tax Act. The High Court allowed the appeal holding that cash in hand in excess of Rs.50,000 held by the individual assessees formed part of assets under section 2(ea)(vi). The individual assesses approached the Supreme Court. The learned counsel for the assessee’s contended that the High Court had committed an error by not framing substantial question of law as per the provisions of section 27A(3) of the Wealth-tax Act, 1957. The Supreme Court held that the appeal under the aforesaid section could be admitted only when a substantial question of law is involved in the appeal and according to s/s. (4), of the question of law has to be formulated by the High Court.

The Supreme Court found that the such a question had not been framed and without framing question of law, the appeal had been decided by the High Court. The Supreme Court therefore remitted the matter to the High Court so that a substantial question of law could be framed, if any, and the appeal be heard again.

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Report of Accountant to be filed along with the return – Condition is directory and not mandatory – The report should however be filed before the order of assessment is made.

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CIT vs. G.M. Knitting Industries (P) Ltd. and CIT vs. AKS Alloys (P) Ltd. [2015] 376 ITR 456 (SC)

Additional depreciation u/s. 32(1)(iia) had been denied to the assessee on the ground that the assessee had failed to furnish form 3AA along with the return of income. The Tribunal allowed additional depreciation as claimed by the assessee. The High Court noted that the Form 3AA was submitted during the course of assessment proceedings and that it was not in dispute that the assessee was entitled to the additional depreciation. The High Court dismissed the appeal of the Revenue in the light of its judgment in CIT vs. Shivanand Electronics (1994) 209 ITR 63 (Bom). On further appeal by the Revenue, the Supreme Court dismissed the appeal concurring with the view of the High Court and holding that even if Form 3AA was not filed along with the return of income but same was filed during the assessment proceedings and before the final order of the assessment was made, that would amount to sufficient compliance.

Note: The above were the facts in G.M. Knitting Industries (P) Ltd.

The facts in AKS Alloys (P) Ltd. were as under:

The Appellant was engaged in the business of manufacture of steel ingots. In respect of the assessment year 2005-06, assessment order dated December 26, 2007, was passed u/s. 143(3) of the Act, in which, the Assessing Officer disallowed the claim of the assessee made u/s. 80-IB of the Act on the ground that for the purpose of claiming deduction, the assessee did not file necessary certificate in Form 10CCB along with the return of income.

The first Appellate authority allowed the appeal, thereby granting the claim of the assessee made u/s. 80-IB of the Act. The Appellate Tribunal, dismissed the appeal of the Revenue. On further appeal the Supreme Court held that the substantial question of law namely, whether the filing of audit report in Form 10CCB is mandatory, was well settled by a number of judicial precedents that before the assessment is completed, the declaration could be filed.

The Supreme Court disposed of both the matters by a common order.

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Housing Project – Special Deduction – Law before 1st April, 2002 – There was no limit fixed in section 80-IB(10) regarding built-up area to be used for commercial purpose in a housing project and it could be constructed to the extent provided in local laws under which local authority gives sanction to the housing project.

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CIT vs. Veena Developers [SLP (c) No.22450 of 2011 dated 30-4-2015]

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.

Housing Project – Special Deduction- Section 80IB(10) – Change of Law with effect from 1st April, 2005 – 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.

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CIT vs. Sarkar Builders (2015) 375 ITR 392(SC)

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.

Surtax – Exemption – Agreements with foreign companies for services or facilities for supply of ship, aircraft, machinery and plant to be used in connection with the prospecting or extraction or production of mineral oils – Chargeable profits are liable to tax under the Companies (Profits) Surtax Act, 1964 – Exemption vide Notification No.GSR 370(E) dated 31-3-1983 u/s. 24AA not available.

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Oil and Natural Gas Corporation Ltd. vs. CIT (2015) 377 ITR 117(SC)

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.

Non-Resident – Income deemed to accrue or arise in India – Prospecting, extraction or production of mineral oils – Presumptive Tax – If the works or services mentioned under a particular agreement was directly associated or inextricably connected with prospecting, extraction or production of mineral oils, 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.

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Oil and Natural Gas Corporation Ltd. vs. CIT (2015) 376 ITR 306 (SC)

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.

Capital Gains – Exemption u/s. 54G – Transfer of Unit from Urban Area to Non-Urban Area – Advances paid for the purpose of purchase and/or acquisition of the 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.

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Fire Boards (P) Ltd. vs. CIT [2015] 376 ITR 596 (SC)

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.

Power of High Court to Review – High Courts being courts of record under Article 215 of the Constitution of India, the power of review would inherent in them and section 260A(7) does not purport in any manner to curtail or restrict the application of the provisions of the Code of Civil Procedure.

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CIT vs. Meghalaya Steels Ltd. [2015] 377 ITR 112 (SC)

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.

Wealth Tax – Valuation of Asset – “Price that asset would fetch in market” – Valuation of vacant land in excess of ceiling limit could only be valued at the amount of maximum compensation under the Ceiling Act.

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S. N. Wadiyar (Decd. Through L. R.) vs. CWT [2015] 378 ITR 9 (SC)

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. 

Co-operative Society – Special Deduction – Matter remanded to the Commissioner to decide as to whether the society is entitled to deduction u/s. 80P(2)(a)(iii) and whether benefit earned under Sampath Incentive Scheme, 1997 was a capital receipt

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DCIT vs. Budhewal Co-operative Sugar Mills Ltd. [2015] 373 ITR 35 (SC)

For the assessment year 1993-94, the appellant , a co-operative sugar mill engaged in the business of manufacturing sugar and allied products from the sugarcane supplied to it by its member farmers (sugarcane growers), claimed deduction of Rs.16,75,462 under the provisions of section 80P(2)(d) of the Act. During the pendency of the appeal before the Tribunal, the following two additional grounds were sought to be taken under Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963:

“1. That the appellant was entitled to claim of deduction u/s. 80P(2)(a)(iii) of the Act being co-operative society engaged in marketing of agriculture produce of its members. Hence, its total income was not liable to be taxed.

2. That in the alternative, the appellant was entitled to be allowed claim for deduction amounting to Rs.1,74,64,478 representing benefit earned under the Sampath Incentive Scheme, 1997, being the capital receipt in contradistinction to revenue receipt as wrongly returned while computing the total income.”

The Hon’ble Tribunal, vide judgment dated 24th September, 2002, declined the request of the appellant to raise the abovementioned two additional grounds on the ground that the entire material was not before the subordinate authorities and detailed investigation of facts for want of facts would not be possible.

The High Court held that the appellant sugar-mill was engaged in the manufacturing of sugar products from the sugarcane supplied by members, who were admittedly sugarcane growers. Since the appellant sugar-mill was engaged in the marketing of agricultural produce of its members, therefore, it was entitled for the exemption as provided u/s. 80P(2)(a)(iii) of the Act.

The High Court drew support from its Full Bench judgment in the case of the Budhewal Co-operative Sugar Mills Ltd. vs. CIT [2009] 315 ITR 351 (P&H) [FB], wherein it was held that co-operative society engaged in the manufacturing and sale of sugar out of the sugarcane grown by its members is entitled for deduction u/s. 80P(2) (a)(iii) of the Act.

The High Court noted that the Hon’ble Apex Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) has held that keeping in mind the object behind the payment of the incentive subsidy, that the payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature. According to the High Court in the present case also, the grant was not for the purpose of bringing into existence new assets but was for the purpose of making payment to the sugarcane growers, therefore, same should be treated as capital receipt.

On appeal by the Revenue, the Supreme Court remanded the matter to the file of the Commissioner of Income-tax (Appeals), in view of the order passed by it in Morinda Cooperative Sugar Mills Ltd. vs. CIT [2013] 354 ITR 230 (SC).

The Supreme Court however clarified that it had not expressed any opinion on the merits of the case and that the assessee was entitled to raise the contention before the Commissioner that in so far as the second issue was concerned, it was covered in its favour by the decision of the Supreme Court in CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC)].

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Appeal to the Supreme Court – No question of law arises from the finding of fact that the sale and lease back transactions was a sham

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Avasarala Technologies Ltd. vs. JCIT (2015) 373 ITR 34 (SC)

The assessee claimed depreciation on certain machinery allegedly purchased from Andhra Pradesh State Electricity Board (APSEB), vide sale deed dated 29-9-1995, which, as per the assessee, was given to the APSEB itself on lease. All the authorities found, as a fact, that there was no such purchase of machinery and the transaction in question was sham. On that basis, it was concluded that since the machinery was not purchased by the assessee, it never became the owner of the machinery and therefore could not claim any depreciation thereof. The Supreme Court held that these were pure findings of facts recorded by the authorities below and did not give rise to any question of law.

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Appeal to the High Court – Circular No. 3 of 2011 (which stipulates monetary limit for appeals by Department) should not be applied ipso facto, particularly, when the matter has cascading effect.

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CIT vs. Century Park (2015) 373 ITR 32 (SC)

The High Court dismissed the appeal filed by the Revenue as not maintainable without going into merits since the net tax effect in respect of the subject matter of the appeal was less than Rs.10,00,000 in view of the Circular No.3 of 2011. On appeal by the Revenue, the Supreme Court [vide order dated 1st April, 2015] granted liberty to the Department to move the High Court to point out that the Circular dated 9th February, 2011, should not be applied ipso facto, particularly, when the matter has a cascading effect. The Supreme Court observed that there are cases under the Income-tax Act, 1961, in which common principle may be involved in subsequent group of matters or large number of matters. According to the Supreme Court, in such cases if the attention of the High Court is drawn, the High Court would not apply the Circular ipso facto.

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Depreciation – Once the assessee proves the ownership of the assets and its use for the business purpose, he is entitled to depreciation u/s. 32

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K. M. Sugar Mills Ltd. vs. CIT (2015) 373 ITR 42 (SC)

The appellant-assessee had set up its unit some time in September, 1985 to carry on the business of manufacturing and compressing oxygen, hydrogen, nitrogen amonis, carbonic acid, action (including dissolved) argon, cooking gas and other types of industrial gases or kind substances etc. For running the aforesaid plant, the assessee had also bought 1,250 gas cylinders. However, since the unit had not started functioning, these gas cylinders were leased out to M/s. Saraveshwari Gases (P) Limited, Ghaziabad and M/s. Malik Industries. In the return filed by the assessee, he claimed depreciation on those gas cylinders at the rate of 100 %, as provided under the rules on the aforesaid item.

The Assessing Officer, however, rejected the claim of depreciation on the ground that hiring business was not proved. The appeal filed by the assessee before the Commissioner of Income Tax (Appeals) was accepted on the ground that the income received from leasing the aforesaid equipments would be treated as business income and on that basis he allowed the depreciation.

The aforesaid order of the CIT(Appeals) was set aside by the Income Tax Appellate Tribunal, and the order of the Income Tax Appellate Tribunal was upheld by the High Court. The High Court has concurred with the opinion of the Tribunal on the ground that the cylinders were not purchased for leasing business and one of the parties to whom the cylinders were leased out is the manufacturer and seller of the cylinders. It was further stated that the cylinders were dispatched to the other party only a day before the closing of the accounting period.

On an appeal by the Appellant-assessee, the Supreme Court held that the aforesaid reasons given by the Income Tax Appellate Tribunal and the High Court in denying the depreciation did not appear to be valid reasons in law. Insofar as the purchase of gas cylinders by the assessee was concerned, this fact was not disputed. It was also not disputed that these gas cylinders were purchased for business purpose. In fact, the plea of the assessee that the manufacturing unit had not started functioning and this had necessitated the assessee to lease out these gas cylinders to the aforesaid two parties to enable it to earn some income, rather than keeping those cylinders idle, was also not in dispute. On the contrary, the income which was generated from leasing out those gas cylinders was treated as “business income”. Once the income from leasing those gas cylinders was accepted as the “business income”, which was taxed at the hands of the assessee as such, there was no reason how the depreciation on these gas cylinders could have been disallowed on the ground that the cylinders were not purchased for “leasing business”.

According to the Supreme Court, the aforesaid facts clearly demonstrated that the assessee had proved ownership of these gas cylinders and use of these gas cylinders for business purpose. Once these ingredients were proved, the assessee was entitled to depreciation u/s. 32 of the Income-tax Act. The Supreme Court, therefore, set aside the judgment of the High Court, and held that the assessee was entitled to depreciation as claimed for the assessment year in question.

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Business Expenditure – Disallowance u/s. 40A(3) of payments in cash in excess of specified limit in an assessment made for a block period – Provisions to be applied as applicable for the assessment years in question

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M. G. Pictures (Madras) Ltd. vs. ACIT (2015) 373 ITR 39 (SC)

The appellant/assessee was engaged in production and distribution of motion pictures mainly in Tamil language. There was a search u/s. 132 of the Income-tax Act, at the business premises of the assessee during which certain book of accounts were seized. Consequent to the search, proposal was made for assessment for the block period of ten years 1.4.1986 to 31.3.1996 and thereafter, up to 13.9.1996.

The Assessing Officer disallowed the expenditure where the payments were made in cash in excess of Rs.10,000/- relying on section 40A(3) of the Act as it stood prior to 1.4.1996.The appellant filed appeal before the Income Tax Appellate Tribunal, Madras Bench (‘the Tribunal’). The Tribunal vide order dated 28.6.2000 partly allowed the appeal and remitted the matter to the Assessing Officer for considering the claim whether the income/loss from the film Thirumurthy was to be computed for the assessment year 1996-97 in accordance with Rule 9A of the Income Tax Rules. It was also directed that in making the computation, the Assessing Officer will consider the expenditure and make the disallowance under the provisions of section 40A(3) of the Act, as was applicable for the assessment year in question.

Feeling aggrieved by the order of the Appellate Tribunal, the appellant filed appeal before the High Court. The High Court did not accept the contentions of the appellant which were based on the amended section 158B(b) in Chapter XIVB of Finance Act, 2002 and dismissed the appeal.
Questioning the validity of the aforesaid judgment of the High Court, the appellant preferred an appeal with the leave of the Supreme Court.

The Supreme Court noted that in the year 1996, the provisions of section 40A(3) of the Act did not allow any expenditure if it was more than Rs.20,000/- and paid in cash. The only exception that was carved out in such cases was where the assessee could satisfactorily demonstrate to the Assessing Officer that it was not possible to make payment in cheque. Even in those cases, the expenditure was allowable up to Rs.10,000/- and all cash payments made in excess of Rs.10,000/- were to be disallowed as the expenditure. Provisions of section 40A(3) were amended with effect from 1.4.1996. With this amendment, in cases where the cash payment is made in excess of Rs.20,000/-, disallowance was limited to 20% of the expenditure.

The Supreme Court observed that since the date of the amendment fell within the aforesaid block period, the assessee wanted the benefit of this amendment for the entire block period of ten years, i.e., 1.4.1986 to 31.3.1996. According to the Supreme Court, such a plea was unacceptable on the face of it inasmuch as the amendment was substantive in nature, which was made clear in the explanatory notes of amendments as well.

The Supreme Court held that once the amendment was held to be substantive in nature, it could not be applied retrospectively. The only ground on which the assessee wanted benefit of this amendment from 1.4.1986 was that the assessment was of the block period of ten years. The Supreme Court noted that, however, on its pertinent query, learned counsel for the appellant was fair in conceding that there was no judgment or any principle which would help the appellant in supporting the aforesaid contention. According to the Supreme Court, the order of the High Court was perfectly justified.

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Trust – Private Discretionary Trust – A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bi<

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CIT vs. Estate of Late HMM Vikramsinhji of Gondal (Civil) Appeal No.2312 of 2007 dated 16-4-2014.

The ex-Ruler of Gondal Shri Vikramsinhji executed three deeds of settlements (trust deeds) in the United States of America on 19th December, 1963 and two deeds in the United Kingdom on 1st January, 1964.

Perusal of the deeds of settlements executed in the U.K. showed that one Mr. Robert Hampton Robertson McGill was designated as the trustee, referred to in the deeds as ‘the Original Trustee’. These trusts were created for the benefit of (a) the Settlor, (b) the children and remoter issue for the time being in existence of the Settlor and (c) any person for the time being in existence who is the wife or widow of the Settlor or the wife or widow or husband or widower of any of them, the children and remoter issue of the Settlor. The trust deeds defined the expression “the Trustees” to mean and include the Original Trustee or the other trustees for the time being appointed in terms of the deeds of settlement.

During his life time, the settlor, Shri Vikramsinhji, was including the whole of the income arising from these trusts in his returns of income. The said income was also included in the two returns filed by his son Jyotendrasinhiji for the assessment year 1970-71. Thereafter, it appears that the assessee – Jyotendrasinhiji took the stand that the income from these trusts is not includible in his income. Jyotendrasinhiji also took the stand that inclusion of the said income in the returns submitted by his father for the assessment years 1964-65 to 1969-70 and by himself for the assessment year 1970-71 was under a mistake.

Jyotendrasinhiji approached the Settlement Commission with an application for settlement relating to income from the U.K. and U.S. trusts. As regards to the U.K. trusts, the Settlement Commission observed as follows:-

“So far as the U.K. trusts are concerned, clause (3) did never come into operation inasmuch as no additional trustees were appointed as contemplated by it. If so, clause (4) sprang into operation whereunder the entire income under the settlements flowed to the settlor during his lifetime and on his death, to his elder son, the appellant herein. In other words, these settlements are in the nature of specific trusts. In any event, the entire income from these trusts was received by the settlor during his lifetime and after the settlor’s death, by the appellant. Therefore, the said income was rightly included in the total income of the settler and the assessee during the respective assessment years.”

The Settlement Commission, accordingly, computed the taxable income of the Settlor under both the sets of trusts – U.S. and U.K. – for the assessment years 1964-65 to 1970-71 (up to the date of the death of the Settlor) as also the income of Jyotendrasinhiji for the assessment years 1970-71 to 1982-83.

The above order of the Settlement Commission reached the Supreme Court in a group of appeals. The Supreme Court, by its judgment dated 2nd April, 1993, Jyotendrasinhji vs. S.I. Tripathi & Others, (1933) Supp. (3) SCC 389, with regard to U.K. trusts did not consider the arguments advanced on behalf of the assessee on merits. The Supreme Court, however, observed that the question urged on behalf of the assessee was academic in the facts and circumstances of the case.

Before the Supreme Court, a group of 17 Appeals came up for hearing, 8 arising from the Income-tax Act, 1961 and 9 arising from the Wealth Tax Act, 1957. Of the 9 Wealth Tax appeals, one appeal related to ‘protective assessment’ for 18 assessment years, i.e, 1970-71 to 1976-77, 1978-79 to1979-80, 1981-82 to 1989-90. The remaining 8 Wealth Tax appeals related to assessment years 1970-71, 1971-72, 1972-73, 1973-74, 1974-75, 1975-76, 1976-77 and 1978-79. In so far as 8 appeals arising from the assessment orders passed under the Income-tax Act, 1961 were concerned, they related to assessment years 1984-85, 1985-86, 1986-87, 1987-88, 1988-89, 1989-90, 1990-91and 1991-92.

From the copies of the returns and balance sheets relating to assessment years 1984-85 to 1991-92, the Supreme Court noted there from that there was an endorsement at the bottom of the statement of funds ending on 31st March of each previous year, ‘Net Income for the year retained.’

The Supreme Court observed that Clause 3 of the deeds of settlement executed in the U.K. left at the discretion of the trustees to disburse benefits to the beneficiaries. The endorsement made in the returns, as noted above, showed that income was retained by the trustees and not disbursed.

The Supreme Court noted that the Income-tax Appellate Tribunal, while considering Clause 3(2) and Clause 4 of the U.K. Trust Deeds referred to the findings of the Settlement Commission and observed that if the trusts were really intended to be discretionary, the trustees had a duty cast on them to ascertain the relative needs and personal circumstances of all the beneficiaries and to allocate the income of the trusts, among them from time to time, according to the objects of the trusts, however, the tell tale facts bring out the intention of the settlor to treat the trust property as his own. The settlor and after his death his son have been showing the income of foreign trusts in the returns of income filed from time to time. Had the trust deeds been really understood by the trustees and the beneficiaries as discretionary by virtue of the operation of Clause 3, one would have expected the state of affairs to have been different. Consequently, the Tribunal held that due to failure on the part of the Maharaja to appoint discretion exercisers as per clause 3(2), Clause 4 has become operative and the U.K. trusts have to be held to be specific trusts.

The Supreme Court further noted that the High court, however, did not agree with the Tribunal’s view on consideration of the relevant clauses of the U.K. Trust Deeds and various judgments of the Supreme Court as well as some High Courts and held that there were distinguishing features for assessment years under appeal and the previous order of the Settlement Commission and the earlier judgment of this Court. The High Court noted the following distinguishing features, viz., (i) the assessee has not admitted having received the income, (ii) the assessee has not received the said income and (iii) the assessee has not shown as taxable income in the returns of all the years under appeal. Having observed the above distinguishing features, the High Court was also of the view that on interpretation of the relevant clauses of the deeds of settlement executed in the U.K., character of the trusts appears to be discretionary and not specific.

The Supreme Court held that a discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour.

The Supreme Court having regard to the above legal position about the discretionary trust and the fact that the income has been retained and not disbursed to the beneficiaries, held that the view taken by the High Court could not be said to be legally flawed. Merely because the Settlor and after his death, his son did not exercise their power to appoint the discretion exercisers, the character of the subject trusts did not get altered.

In the opinion of Supreme Court the two U.K. trusts continued to be ‘discretionary trust’ for the subject assessment years.

The Supreme Court further held that the above position with regard to the discretionary trust was equally applicable to the controversy in appeals under the Wealth Tax Act. The High Court had taken a correct view that the value of the assets could not be assessed on the estate of the deceased Settlor.

The Supreme Court dismissed the appeals with no order as to costs.

Assessment – Intimation – Prima Facie Adjustments – Additional tax – Retrospective amendment made in 1993 was only clarificatory of the position that existed in 1989 and was valid but 143(1A) could be invoked only where it was found in facts that the lesser amount stated in the return filed by the assessee was a result of an attempt to avoid tax lawfully payable by the assessee.

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CIT & Ors. vs. Sati Oil Udyog Ltd. & Anr. (2015) 372 ITR 746 (SC)

The assessee, in its annual return for the assessment years 1989-90 and 1991-92, showed a loss of Rs.1,94,13,40 and Rs. 1,80,22,480 respectively. By an assessment order dated 14th December, 1992, the Assessing Officer levied an additional tax u/s. 143(1A) of Rs. 5,62,490 and Rs. 8,09,290, respectively, for the two assessment years in question calculated in the manner provided in the section.

Being aggrieved by the order dated 14th December, 1992, the respondent filed two separate writ petitions to declare the provisions of section 143(1A) as ultra vires and, consequently, prayed for the quashing of the order dated 14th December, 1992. The learned single judge who heard the two petitions upheld section 143(1A) as amended in 1993 prospectively but held that in so far as it operated with effect from 1989 on losses made by companies, the section is arbitrary and unreasonable and would, therefore, have to be struck down. The Division Bench agreed with single judge and dismissed the two writ appeals before it.

The Supreme Court held that on a cursory reading of the provision, it was clear that the object of section 143(1A) was the prevention of evasion of tax. By the introduction of this provision, persons who has filed returns in which they have sought to evade the tax properly payable by them is meant to have a deterrent effect and a hefty amount of 20% as additional income-tax is payable on the difference between what is declared in the return and what is assessed to tax.

The Supreme Court observed that a plain reading of the provision as it originally stood referred to the total income. Further, it was settled law that the word “income” would include within it both profits as well as losses. The Supreme Court further held that even on a reading of section 143(1)(a) which is referred to in section 143(1A), a loss is envisaged as being declared in a return made u/s. 139. It was clear, therefore, that the retrospective amendment made in 1993 would only be clarificatory of the position that existed in 1989 itself.

According to the Supreme Court, all assessees were put on notice in 1989 itself that the expression “income” contained in section 143(1A) would be wide enough to include losses also. That being the case, on facts there was in fact no retrospective imposition of additional tax–such tax was imposable on losses as well from 1989 itself.

In the present case, the question that therefore arose before the Supreme Court also as to whether bona fide assesses are caught within the net of section 143(1A).

The Supreme Court after referring to its decisions in CIT vs. Hindustan Electric Graphites Ltd. (2000) 243 ITR 48(SC), Asst. CIT vs. J.K. Synthetics Ltd (2001) 251 ITR 200 (SC) and K. P. Varghese vs. ITO 131 ITR 579 (SC); held that section 143(1A) could only be invoked where it was found on facts that the lesser amount stated in the return filed by the assessee was a result of an attempt to evade tax lawfully payable by the assessee. The burden of proving that the assessee had so attempted to evade tax was on the Revenue which could be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee had, in fact, attempted to evade tax lawfully payable by it. Subject to the aforesaid construction of section 143(1A), the Supreme Court upheld the retrospective clarificatory amendment of the said section and allowed the appeals.

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Fees for technical services – The services of qualified and experienced professional who could prepare a scheme for raising requisite finances and tie-up loans for the power projects could be said with certainty would come within the ambit and sweep of the term ‘consultancy service’ in section 9(1)(vii)(b) and, therefore, the tax at source should have been deducted as the amount paid as fee could be taxable as ‘fees for technical service’

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GVK Industries Ltd. & Anr. vs. The Income Tax Officer & Anr. Civil Appeal No. 7796 of 1997 dated February 18, 2015

The appellant, a company, was incorporated under the Companies Act, 1956 for the purpose of setting up a 235 MW Gas based power project at Jegurupadu, Rajahmundry, Andhra Pradesh at an estimated cost of Rs. 839 crore. The main object of the appellant company is to generate and sell electricity.

With the intention to utilie the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finance and tie up the required loan, it sought the services of a consultant and eventually entered into an agreement with ABB – Projects & Trade Finance International Ltd., Zurich, Switzerland, (hereinafter referred to as “Non-Resident Company/NRC”).

The NRC, having regard to the requirements of the appellant-company offered its services as financial advisor to its project from 8th July, 1993. Those services included, inter alia, financial structure and security package to be offered to the lender, making an assessment of export credit agencies world-wide and obtaining commercial bank support on the most competitive terms, assisting the appellant in loan negotiations and documentation with lenders and structuring, negotiating and closing the financing for the project in a coordinated and expeditious manner. For its services the NRC was to be paid, what is termed as, “success fee” at the rate of 0.75% of the total debt financing. The said proposal was placed before the Board meeting of the company on 21st August, 1993 and the Board of Directors approved the appointment of the NRC and advised that it be involved in the proposed public issue of share by the company. The NRC rendered professional services from Zurich by correspondence as to how to execute the documents for sanction of loan by the financial institutions within and outside the country. With advice of NRC the appellant-company approached the Indian Financial Institutions with the Industrial Development Bank of India (IDBI) acting as the Lead Financier for its Rupee loan requirement and for a part of its foreign currency loan requirement it approached International Finance Corporation (IFC), Washington DC, USA. After successful rendering of services the NRC sent invoice to the appellant-company for payment of success fee amount i.e., $.17,15,476.16 (Rs. 5.4 Crore).

After the receipt of the said invoice the appellant-company approached the concerned income tax officer, the first respondent herein, for issuing a ‘No Objection Certificate’ to remit the said sum duly pointing out that the NRC had no place of business in India; that all the services rendered by it were from outside India; and that no part of success fee could be said to arise or accrue or deemed to arise or accrue in India attracting the liability under the Income-tax Act, 1961 (for brevity, ‘the Act’) by the NRC. It was also stated as the NRC had no business connection section 9(1)(i) is not attracted and further as NRC had rendered no technical services section 9(1)(vii) is also no attracted. The first respondent scanning the application filed by the company refused to issue ‘No Objection Certificate’ by his order dated 27th September, 1994.

Being dissatisfied with the said order passed by the first respondent the appellant-company preferred a revision petition before the Commissioner of Income-tax, Hyderabad, u/s. 264 of the Act. On 21st March, 1995 the Commissioner permitted the appellant-company to remit the said sum to the NRC by furnishing a bank guarantee for the amount of tax. The company took steps to comply with the said order but afterwards on 25th October,1995 the revisional authority revoked the earlier order and directed the company to deduct tax and pay the same to the credit of the Central Government as a condition precedent for issuance of the ‘No Objection Certificate’. Thus, the order passed by the first respondent was affirmed and resultantly the revision petition was dismissed.

The non-success in revision compelled the company to approach the High Court for issue of writ of certiorari for quashing of the orders passed by the Income-tax officer and that of by the revisional authority.

The High Court framed the following two issues for consideration:

“(1) Whether ‘success fee’ payable by the petitionercompany to the NRC or any portion thereof is chargeable under the provisions the Act; and

(2) Whether the petitioner-company is entitled to ‘No Objection Certificate’.”

The High Court referring to the contents of the correspondence, the nature and extent of services which the NRC had undertaken under the agreement, the resolution passed by the Board of Directors which had perused the letter dated 8th July, 1993 addressed by the NRC stipulating the scope of services to be undertaken by NRC; the decisions of the Board to pay a fee to NRC and came to hold thus:

“On a careful reading of the letter of proposal of the NRC and the extract of resolution of the Board of Directors of the petitioner-company, it is clear to us that it was no part of the services to be provided by the NRC to manage public issue in India to correspond with various agencies to secure loan for the petitionercompany, to negotiate the terms on which loan should be obtained or to draft document for it. The NRC has only to develop a comprehensive financial model, tie up the rupee/foreign currency loan requirements of the project, assess export credit agencies worldwide and obtain commercial bank support, assist the petitionercompany in loan negotiations and documentation with the lender. It appears to us that the service to be rendered by the NRC is analogous to draw up a plan for the petitioner-company to reach the required destination indicating roads and highways, the curves and the turns; it does not contemplate taking the petitioner-company to the destination by the NRC. Once the NRC has prepared the scheme and given necessary advice and assistance to the petitionercompany for obtaining loan, the responsibility of the NRC is over. It is for the petitioner-company to proceed on the suggested lines and obtain loan from Indian or foreign agencies. On the petitionercompany obtaining loan, the NRC becomes entitled to ‘success fees’.”

The High Court scanned the letters with due consideration and opined that the business connection between the petitioner company and the NRC had not been established. Thereafter, the writ court adverted to the proposition whether success fee could fall within clause (vii) (b) of section 9(1) of the Act. Interpreting the said provision, the High Court opined that:

“Thus from a combined reading of clause (vii) (b) Explanation (2) it becomes clear that any consideration, whether lump sum or otherwise, paid by a person who is a resident in India to a non-resident for running any managerial or technical or consultancy service, would be the income by way of fees for technical service and would, therefore, be within the ambit of “income deemed to accrue or arise in India”. If this be the net of taxation under Section 9 (1) (vii) (b), then ‘success fee’, which is payable by the petitioner company to the NRC as fee for technical service would be chargeable to income tax thereunder. The Income-tax officer, in the impugned order, held that the services offered by the NRC fell within the ambit of both managerial and consultancy services. That order of Income-tax officer found favour by the Commissioner in revision. In the view we have expressed above, we are inclined to confirm the impugned order.”
A contention was advanced before the high Court by the assessee that the nrC did not render any technical or consultancy service to the company but only rendered advise in connection with payment of loan by it and hence, it would not amount to technical or consultancy service within the meaning of section 9(1)(vii)(b) of the act. While not accepting the said submission, the high Court observed that for the purposes of attracting the said provision, the business of the company cannot be divided into water-tight compartments like fire, generation of power, plant and machinery, management, etc. and to hold that managerial and technical and consultancy service relate to management, generation of power and plant and machinery, but not to finance. Elaborating further, the high Court observed that advice given to procure loan to strengthen finances may come within the compartment of technical or consultancy service and “success fee” would thereby come within the scope of technical service within the ambit of section 9(1)(vii)(b) of the act. Being of this view, the high Court opined the assessee was not entitled to the “No Objection Certificate”.

Being aggrieved, the appellant approached the Supreme Court. according to the Supreme Court, the crux of the matter was whether, in the obtaining factual matrix, the High Court was justified in concurring with the view expressed by the revisional authority that the assessee- company was not entitled to “No Objection Certificate” under the act as it was under the obligation to deduct  the tax at source pertaining to payment to the nrC as the character of success fee was substantiated by the revenue to put in the ambit and sweep of section 9(1)(vii)
(b)of the act.

The  Supreme  Court  observed  that  NRC  was  a  non- resident Company and it did not have a place of business in india. The revenue has not advanced a case that the income had actually arisen or received by the NRC in india. The high Court has recorded the payment or receipt paid by the appellant to the NRC as success fee would not be taxable u/s. 9(1)(i) of the act as the transaction/ activity did not have any business connection. that being the position, the singular question that remained to be answered was whether the payment or receipt paid by the appellant to NRC as success fee would be deemed to be taxable in india u/s. 9(1)(vii) of the act. As the factual matrix would show, the appellant had not invoked double  taxation  avoidance  agreement  between  india and Switzerland. that being not there, the Supreme Court was only concerned with as to whether the “success fee” as termed by the appellant was “fee for technical service” as enjoined u/s. 9(1)(vii) of the act.

According to the Supreme Court, the principal provision is Clause (b) of section 9(1)(vii) of the act. the said provision carves out an exception. the exception carved out in the latter part of clause (b) applies to a situation when fee   is payable in respect of services utilised for business or profession carried out by an indian payer outside india  or for the purpose of making or earning of income by the indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside india.

The  Supreme  Court  held  that  on  a  studied  scrutiny  of the said Clause, it becomes clear that it lays down the principle what is basically known as the “source rule”, that is, income of the recipient to be charged or chargeable  in the country where the source of payment is located, to clarify, where the payer is located. the Clause further mandates and requires that the services should be utilised in india.

The two principles, namely, “Situs of residence” and “Situs of source of income” have witnessed divergence and difference in the field of international taxation. The principle “residence State taxation” gives primacy to the country of the residency of the assessee. This principle postulates taxation of world-wide income and world-wide capital in the country of residence of the natural or juridical person. The “Source State taxation” rule confers primacy to right to tax to a particular income or transaction to the State/nation where the source of the said income is located. The second rule, as is understood, is transaction specific. To elaborate, the source State seeks to tax the transaction or capital within its territory even when the income benefits belongs to a non residence person, that is, a person resident in another  country.  The  aforesaid  principle  sometimes  is given a different name, that is, the territorial principle. It  is apt to state here that the residence based taxation is perceived as benefiting the developed or capital exporting countries whereas the source based taxation protects and is regarded as more beneficial to capital importing countries, that is, developing nations. Here comes the principle of nexus, for the nexus of the right to tax is in the source rule. It is founded on the right of a country to tax the income earned from a source located in the said State, irrespective of the country of the residence of the recipient. It is well settled that the source based taxation is accepted and applied in international taxation law.

The two principles that have been mentioned hereinabove, are also applied in domestic law in various countries. the source rule is in consonance with the nexus theory and does not fall foul of the said doctrine on the ground of extra-territorial operation. The doctrine of source rule has been explained as a country where the income or wealth is physically or economically produced.

Appreciating the aforesaid principle, it would apply where business activity is wholly or partly performed in a source State, as a logical corollary, the State concept would also justifiably include the country where the commercial need for the product originated, that is, for example, where the consultancy is utilised. From  the  aforesaid,  it  is  quite  vivid  that  the  concept  of income source is multifaceted and has the potentiality to take different forms. The said rule has been justified on the ground that profits of business enterprise are mainly the yield of an activity, for capital is profitable to the extent that it is actively utilised in a profitable manner. To this extent, neither the activity of business enterprise nor the capital made, depends on residence.

The  purpose  of  adverting  to  these  aspects  is  only  to highlight that the source rule has been accepted in the un Commentaries and the organisation of economic Corporation  and  development  (OECD)  Commentaries. It is well known that what is prohibited by international taxation law is imposition of sovereign act of a State on a sovereign territory. This principle of formal territoriality applies in particular, to acts intended to enforce internal legal  provisions  abroad.  Therefore,  deduction  of  tax  at source when made applicable, it has to be ensured that this principle is not violated.

The  Supreme  Court  adverting  to  the  instant  case,  held that, it was evident that fee which had been named as “success fee” by the appellant had been paid to the NRC. It had to be seen whether the payment made to the non- resident would be covered under the expression “fee for technical service” as contained in explanation (2) to section 9(1)(vii) of the act. The said expression means any consideration, whether lumpsum or periodical in rendering managerial, technical or consultancy services. It excludes consideration paid for any construction, assembling, mining or like projects undertaken by the non-resident that is the recipient or consideration which would be taxable in the hands of the non- recipient or non-resident under the head “salaries”. In the case at hand, the said exceptions were not attracted. What was required to be scrutinised was that the appellant had intended and desired to utilise expert services of qualified and experience professional who could prepare a scheme for raising requisite finances and tie-up loans for the power projects. As the company did not find any professional in India, it had approached the consultant NRC located in Switzerland, who offered their  services.  Their  services  rendered  included,  inter alia, financial structure and security package to be offered to the lender, study of various lending alternatives for the local and foreign borrowings, making assessment of expert credit agencies world-wide and obtaining commercial bank support on the most competitive terms, assisting the appellant company in loan negotiations and documentations with the lenders, structuring, negotiating and closing financing for the project in a coordinated and expeditious manner.

The  Supreme  Court  held  that  from  the  letter  dated 8.7.1993 addressed by the NRC and resolution passed by the Board on 21st august, 1993, it was clear as crystal that the obligation of the NRC was to:

“(i) Develop comprehensive financial model to  tie-up  the rupee and foreign currency loan requirements of the project.

(ii)    assist expert credit agencies world-wide and obtain commercial bank support on the most competitive terms.
(iii)    assist the appellant company in loan negotiations and documentation with the lenders.”

Pursuant to the  aforesaid  exercises  carried  out  by  the NRC, the company was successful in availing loan/financial assistance in India from the Industrial development Bank of india (IDBI) which acted as a lead financier for the rupee loan requirement. For foreign currency loan requirement, the appellant approached international   finance   Corporation,   Washington   D.C., USA and was successful. in this backdrop, “success fee” of Rs. 5.4 crore was paid to the NRC.

According to the Supreme Court, it was in this factual score, that the expression, managerial, technical or consultancy  service,  were  to  be  appreciated.  The  said expressions have not been defined in the Act, and, therefore, it was obligatory on the part of the Supreme Court to examine how the said expressions are used and understood  by  the  persons  engaged  in  business.  The general and common usage of the said words has to be understood at common parlance.

The Supreme Court held that in the case at hand, it was concerned with the expression “consultancy services” and in this regard, a reference to the decision by the authority for advance ruling In Re.P.No. 28 of 1999 (1999) 242 itr 280, would be applicable. The observations therein read as follows:

“By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it.”

In this context, according to the Supreme Court, a reference to the decision in C.I.T. vs. Bharti Cellular Limited and others (2009) 319 ITR 139, was also apposite. In the said case, while dealing with the concept of “consultancy services”, the high Court of delhi has observed thus:

“Similarly, the word “consultancy” has been defined in the said Dictionary as “the work or position of a consultant; a department of consultants.” “Consultant” itself has been defined, inter alia, as “a person who gives professional advice or services in a specialized field.” It is obvious that the word “consultant” is a derivative of the word “consult” which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as “ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action”. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.”

The  Supreme  Court,  in  this  context,  referred  to  the dictionary   meaning   of   ‘consultation’   in   Black’s   law dictionary,  eighth  edition.  The  word  ‘consultation’  has been defined as an act of asking the advice or opinion  of someone (such as a lawyer). It means a meeting in which a party consults or confers and eventually it results in human interaction that leads to rendering of advice.

The  Supreme  Court  held  that  as  the  factual  matrix  in the case at hand, would exposit the nrC had acted as   a consultant. It  had the  skill, acumen and knowledge   in the specialised field i.e. preparation of a scheme for required finances and to tie-up required loans. The nature of service referred by the nrC, can be said with certainty would come within the ambit and sweep of the term ‘consultancy service’ and, therefore, it had been rightly held that the tax at source should have been deducted as the amount paid as fee could be taxable as ‘fees for technical service’. once the tax is payable the grant of ‘no Objection Certificate’ was not legally permissible. Ergo, the judgment and order passed by the high Court was absolutely impregnable.

The   Supreme   Court   dismissed   the   appeal,   being devoid of merit.

Agricultural Income-tax – Legislative Powers – Retrospective Legislation – The Legislature has powers to render the judicial decision in a case ineffective by enacting a valid law on a topic within the legislative field which fundamentally alters or change the character of legislation retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the court if those conditions had existed at the time of declaring the law as invalid.

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Asst. Commissioner of Agricultural Income-tax & Ors. vs. Netley “B” Estate and Ors. [2015] 372 ITR 590 (SC)

Before the Supreme Court the issue in a batch of appeals was whether the assessment of agricultural income received by a firm after it was dissolved in so far as the income of the firm pertained to actual cash receipts after the firm was dissolved but relating to income earned prior to dissolution.

The Supreme Court noted that in L.P. Cardoza vs. Agricultural ITO [1997] 227 ITR 421 (Karn.), the question involved was as to whether a dissolved firm could be assessed to agricultural income-tax after the date of its dissolution in respect of income received for supply of goods made by the firm prior to its dissolution. This question arose in the light of section 26(4) and section 27 as they then stood, that is, as they stood in 1987.

The Karnataka High Court had held that there was nothing in section 26(4), as it then stood or section 27, to indicate that where the firm is dissolved and income is received after dissolution in respect of agricultural produce supplied by the firm before dissolution, the firm itself could be assessed in the year of receipt of income notwithstanding its dissolution.

Faced with this decision of the Karnataka High Court, the Legislature amended section 26(4) retrospectively, that is, with effect from, 1st April, 1975. The amended provision as follows:

“26. (4) Where any business through which agricultural income is received by a company, firm or association of persons is discontinued or any such firm or association is dissolved in any year, any sum received after the discontinuance or dissolution shall be deemed to be income of the recipient and charged to tax accordingly in the year of receipt, if such would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance or dissolution.

Explanation – For the removal of doubts, it is hereby declared that where before the discontinuance of such business or dissolution of a firm or association hitherto assessed as a firm or association, or as the case may be, on the company, the crop is harvested and disposed of, but full payment has not been received for such crop, or the crop is harvested and not disposed of, the income from such crop shall, notwithstanding the discontinuance or dissolution be deemed to be the income of the company, firm or association for the year or years in which it is received or receivable and the firm or association shall be deemed to be in existence, for such year or years and such income shall be assessed as the income of the company, firm or association according to the method of accounting regulatory employed by it immediately before such discontinuance or dissolution.”

The said amendment was the subject matter of challenge before a learned single judge of the Karnataka High Court. The single judge repelled the challenge basically on the ground that the Explanation only clarified the main provision and, therefore, did not go beyond the main provision. Equally, since the Legislature has the right to amend both prospectively and retrospectively, all that was done in the present case was an exercise of the legislative power retrospectively and, therefore, no question arose of any discrimination on this count. The single judge, therefore, dismissed the writ petitions before him.

In appeal before the Division Bench, the Division Bench set out all the aforesaid provisions and ultimately found, following the judgment in D. Cawasji & Co. vs. State of Mysore [1984] (Suppl.) SCC 490/ 150 ITR 648, that the Amending Act of 1997 suffered from the vice that was found in Cawasji’s case, namely, that it interfered directly with the judgment of the High Court and would, therefore, have to be struck down as unconstitutional on this score alone. This the Division Bench found because, according to the Division Bench, in the Statement of Objects and Reasons for the 1997 amendment, it was held that the object of the amendment was to undo the judgment of the High Court of Karnataka in Cardoza’s case.

The Supreme Court was thus concerned with the validity of Explanation added retrospectively to section 26(4) of the Karnataka Agricultural Income-tax Act (hereinafter referred to as “the Act”).

The Supreme Court noticed that in the amended section 26(4), two changes were made. Whereas in the original provision, no express reference was made to companies or association of persons, and no reference whatsoever was made to a dissolved firm, both were added. By the Explanation, which is for the removal of doubts, he Legislature declared that where before dissolution of a firm, full payment was not received in respect of income that has been earned pre-dissolution, then notwithstanding such dissolution, the said income would be deemed to be the income of the firm in the year in which it was received or receivable and the firm would be deemed to be in existence for such year for the purposes of assessment. By this amendment, the basis of the law as it stood when Cardoza’s case was decided had been changed.

The Supreme Court held that all that had been done in the present case was to remove the basis of the law as it stood in 1987 which was interpreted in Cardoza’s case as leading to a particular result. All that the Legislature has done in the present case is to say that with effect from 1st April, 1975, dissolved firms will by legal fiction, continue to be assessed, for the purposes of levy and collection of agricultural income-tax, in so far as they receive income post-dissolution but relating to transactions pre-dissolution. In no manner has the Legislature in the present case sought to directly nullify the judgment in Cardoza’s case. All that had happened was that the legal foundation on which the Cardoza’s case was built was retrospectively removed, something which was well within the legislative competence of the Legislature.

The Supreme Court further held that the judicial decision in Cardoza’s case had been rendered ineffective by enacting a valid law on a topic within the legislative field which fundamentally alters or change the character of legislation retrospectively. The changed or altered conditions are such that the previous decision would not have been rendered by the court if those conditions had existed at the time of declaring the law as invalid. The Legislature had not directly overruled the decision of any court but has only rendered, as has been stated above, such decision ineffective by removing the basis on which the decision was arrived at.

The Supreme Court set aside the impugned judgment of the Division Bench of the High Court, and allowed the appeals.

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Reassessment – Full and true disclosure of materials facts – Supreme Court directed the Commissioner of Income Tax (Appeals) to decide the appeal without being influenced by the observation of the High Court that though the Assessing Officer enquired into the matter and the assessee having furnished the material still there was no full and true disclosure as the Assessing Officer had not applied his mind to a particular aspect of the issue.

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Indian Hume Pipe Co. Ltd. vs. ACIT and Others. [SLP (Civil) No.5195 of 2012 dated 20-7-2012]

On July 13, 2001, the petitioner entered into memorandum of understanding with a third party, Dosti Associates, for the transfer of development rights in certain land for a consideration of Rs. 39 crore. Following this a development agreement was entered into on 31st October, 2001. Finally, a supplemental agreement was entered into on 15th December, 2003, by which in consideration of the total agreed of Rs. 39 crore paid by the developer to the petitioner, the petitioner recognised the acquisition by the developer of the absolute right to develop the property. Clause 5 of the agreement stipulated that with effect from 15th December, 2003, the developer had been placed in absolute and complete possession of the property. The petitioner filed a return of income for the assessment year 2004-05. In the computation of assessable income, profits on the sale of land amounting to Rs. 38.75 crore were considered separately.

The petitioner annexed a working of the taxable long-term capital gains. The total long-term capital gains were computed at Rs. 23.19 crore. The petitioner claimed an exemption u/s. 54EC of the Income-tax Act, 1961, stating that a total amount of Rs. 23.24 crore had been invested in specified bonds of the National Highway Authority of India (Rs. 2 crore), the Rural Electrification Corporation of India (Rs.14.44 crore) and the National Housing Bank (Rs. 6.80 crore). The computation of capital gains in the amount of Rs. 23.19 crore, as stated earlier, was based on the total consideration of Rs. 39 crore received for the sale of development rights under the conveyance executed on 31st December, 2003; from which an amount of Rs.15.80 crore was deducted representing the value of the land as on 1st April, 1981.

During the assessment proceedings, the Assessing Officer asked for a copy of the agreements with the purchaser and other details which the assessee furnished. A copy of each of the section 54EC bonds (which gave the dates of investments) was also furnished. The Assessing Officer passed an order of assessment u/s. 143(3) on 27th November, 2006 allowing the deduction as claimed.

A notice was issued to the Petitioner by the Assessing Officer after an audit query was raised on 4th June, 2007. As per the audit query the Petitioner was entitled to deduction u/s. 54EC only in respect of the amount of Rs. 6.80 crore which was invested within six months from the date of sale deed. The remaining amounts had been invested between 1st February, 2002 and 30th June, 2002, prior to date of transfer, that is, 15th December, 2003.

A notice for reopening assessment was issued on 29th March, 2011, u/s. 148. As per the reasons recorded deduction u/s. 54EC was not admissible on the investments made prior to the date of transfer.

The petitioner filed a Writ Petition to challenge the reopening on the ground that there was no failure on its part to make a full and true disclosure of material facts.

The High Court (348 ITR 439) held that the Petitioner, in the return of income that was originally filed, submitted a computation of taxable long-term capital gains. After computing the long-term capital gains at Rs. 23.19 crore, the Petitioner sought to deduct therefrom an amount of Rs. 23.24 crore investment u/s. 54EC. The statement, however, was silent on the date on which the amounts were invested. The Asessing Officer did during the course of the assessment proceedings raise a query on 14th July, 2006, seeking an explanation of an amount of Rs. 38.75 crore credited from the sale of certain property. The Assessing Officer called upon the Petitioner to furnish a copy of the sale deed together with the details of the property sold; valuation reports for determination of the fair market value as on 1st April, 1981, and a detailed working of capital gains arising out of the sale of the property. The Petitioner disclosed the sale agreements and furnished a working of capital gains which was in terms of what was submitted with the return of income. The High Court noted that, neither in the return of income nor in the disclosures that were made in response to the query of the Assessing Officer did the Petitioner make any reference to the dates on which amounts were invested in bonds of the National Highway Authority of India, Rural Electrification Corporation of India and National Housing Bank. The petitioner did enclose copies of the certificates which did bear the date of allotment. According to the High Court it was evident that the Assessing Officer had clearly not applied his mind to the question as to whether the petitioner had fulfilled the conditions specified in section 54EC for availing of an exemption. Also, the petitioner was required to make a full and true disclosure of materials facts which did not appear either from the computation of taxable long-term capital gains in the original return of income or in the computation that was submitted in response to the query of the Assessing Officer. In both the sets of computation there was a complete silence in regard to the dates on which the amounts were invested. The assessment order did not deal with this aspect. In the circumstances, the High Court held that there was no full and proper disclosure by the petitioner of all the material facts necessary for the assessment.

The Petitioner challenged the order of the High Court before the Supreme Court but later the learned counsel for the petitioner sought permission to withdraw the Special Leave Petition in view of the fact that petitioner’s appeal, bearing No. IT No.63/2012-2013 was pending before Commissioner of Income Tax (Appeals) against the Order of re-assessment dated 29th May, 2012. The Supreme Court while permitting the Petitioner to do so, however, clarified that on the issue of validity of Notice u/s. 148 of the Income-tax Act, 1961, it would be open to the petitioner as well as Department to put forth their respective contentions before the Appellate Authority and the Appellate Authority would decide this issue also along with other issues without being influenced by the observation made by the High Court in the its order.

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Exemption – Educational Institution – When a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit.

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Queen’s Educational Society vs. CIT [2015] 372 ITR 699 (SC)

The
Appellant filed its return for the assessment years 2000-01 and 2001-02
showing a net surplus of Rs.6,58,862 and Rs.7,82,632, respectively.
Since the appellant was established with the sole object of imparting
education, it claimed exemption u/s. 10(23C)(iiiad) of the Income-tax
Act, 1961. The Assessing Officer, vide his order dated 20th February, 2003, rejected the exemption claimed by the appellant. The Commissioner
of Income-tax (Appeals) by his order dated 28th March, 2003, allowed the
appellant’s appeal, and the Income-tax Appellate Tribunal, Delhi, by
its judgment dated 7th July, 2006, passed an order dismissing the appeal
preferred by the Revenue.

The Income-tax Appellate Tribunal while granting exemption u/s. 10(23C)(iiiad) recorded the following reasons:

“During
the years relevant for the assessment year 200-01 and 2001-02, the
excess of income over expenditure stood at Rs.6,58,862 and Rs.7,82,632,
respectively. It was also noticed that the appellant society had made
investments in fixed assets including building at Rs.9,52,010 in the
financial year 1999-2000 and Rs.8,47,742 in the financial year 2000-01
relevant for the assessment years 2000- 01 and 2001-02, respectively.
Thus, if the amount of investment into fixed assets such as building,
furniture and fixture, etc., were also kept in view, there was hardly
any surplus left. The assessee-society is undoubtedly engaged in
imparting education and has to maintain a teaching and non-teaching
staff and has to pay for their salaries and other incidental expenses.
It, therefore, becomes necessary to charge certain fees from the
students for meeting all these expenses. The charging of fee is
incidental to the prominent objective of the trust, i.e., imparting
education. The trust was initially running the school in a rented
building and the surplus, i.e., the excess of the receipts over
expenditure in the year under appear (and in the earlier years) has
enabled the appellant to acquire its own property, acquire computers,
library books sports equipment, etc., for the benefit of the students.
And more importantly the members of the society have not utilised any
part of the surplus for their own benefit. The Assessing Officer wrongly
interpreted the resultant surplus as the main objective of the assessee
trust. As held above, profit is only incidental to the main object of
spreading education. If there is no surplus out of the difference
between receipts and outgoings, the trust will not be able to achieve
the objectives. Any education institution cannot be run in rented
premises for all the times and without necessary equipment and without
paying to the staff engaged in imparting education. The assessee is not
getting any financial aid/assistance from the Government or other
philanthropic agency and, therefore, to achieve the objective, it has to
raise its own funds. But such surplus would not come within the ambit
of denying exemption u/s. 10(23C)(iiiad) of the Act.”

In a
reference to the High Court u/s. 260A of the Income-tax Act, the High
Court, vide the impugned judgment set aside the judgment of the
Incometax Appellate Tribunal and affirmed the order of the Assessing
Officer.

The Uttarakhand High Court held: “Thus, in view of the
established fact relating to earn profit, we do not agree with the
reasoning given by the Income-tax Appellate Tribunal for granting
exemption.”

On appeal, the Supreme Court held that the High
Court did not apply its mind independently. The High Court copied one
paragraph from the Supreme Court judgment in Aditanar Educational
Institution vs. Addl CIT (1997) 224 ITR 310 (SC), followed by a
paragraph of faulty reasoning by the Assessing Officer and the said
faulty reasoning of the Assessing Officer had been wrongly said to be
the law laid down by the apex court. The High Court had erred by quoting
a non-existent passage from the said judgment

Further, the High Court had erred quoting a portion of a property tax judgment in Municipal Corporation of Delhi vs. Children Book Trust and Safdarjung Enclave Educational Society vs. Municipal Corporation of Delhi (1992) 3 SCC390, which expressly stated that ruling arising out of the Income-tax Act would not be applicable. It also went on to further quote from a portion of the said property tax judgment which was rendered in the context of whether an educational society is supported wholly or in part by voluntary contributions, something which was completely foreign to section 10(23C)(iiiad).

According to the Supreme Court, the final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of section 10(23C) is to ignore the language of the section and to ignore tests laid down in the Surat Art Silk Cloth’s case (121 ITR1), Aditanar’s case (supra) and the American Hotel and Lodging’s case (301 ITR 86).

The Supreme Court held that when a surplus is ploughed back for educational purposes, the educational institution exist solely for educational purposes and not for purposes of profit.

The Supreme Court set aside the judgment of the Uttarakhand High Court holding that the reasoning of the Income-tax Appellate Tribunal (set aside by the High Court) was more in consonance with the law laid down by it.

The Supreme Court approved the judgment of the Punjab and Haryana High Court in Pinegrove International Charitable Trust (327 ITR 73), Delhi High Court in St. Lawrence Educational Society vs. CIT (353 ITR 320) and Bombay High Court in Tolani education Society (351 ITR 184).

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Reference- High Court- Question of Law- The legal inferences that should be drawn on the primary facts is eminently a question of law.

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Premier Breweries Ltd vs. CIT (2015) 372 ITR 180 (SC)

Business Expenditure – The High Court rightly reversed the order of the Tribunal allowing the claim of deduction of commission paid to agents to co-ordinate with the retailers and State Corporation which were exclusive wholesalers of alcoholic beverages based on primary facts.

The appellants were engaged in the manufacture and sale of beer and other alcoholic beverages. Certain States like Kerala and Tamil Nadu had established marketing corporations which were the exclusive wholesalers of alcoholic beverages for the concerned State whereby all manufactures had to compulsorily sell their products to the State Corporations which, in turn, would sell the liquor so purchased, to the retailers. It was pleaded by the appellants that manufacturers of beverages containing alcohol had to engage services of agents who would co-ordinate with the retailers and State Corporations to ensure continuous flow/supply of goods to the ultimate consumers. And on that ground they sought deduction u/s. 37 of the Act.

The claim made by the assessee in the facts noted above was disallowed by the Assessing Officer. The said order of the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals). The assessee had moved the learned Income-tax Appellate Tribunal, Cochin Bench against the aforesaid orders. The learned Tribunal took the view that the assessee was entitled to claim for deduction. The said view of the learned Tribunal was reversed by the High Court in the Reference made to it u/s. 256(2) of the Act.

Before the Supreme Court, three propositions were advanced on behalf of the appellants. The first was whether the High Court could have reframed the questions after the conclusion of the arguments and that too without giving an opportunity to the assessee. The answer to the above question, according to the appellant, was to be found in M. Janardhana Rao vs. Joint CIT (237 ITR 50) wherein the Supreme Court had held that questions of law arising in an appeal u/s. 260A of the Act must be framed at the time of admission and should not be formulated after conclusion of the arguments.

The second issue raised was the jurisdiction of the High Court to set aside the order of the Tribunal in the exercise of its reference jurisdiction. According to the appellants, the point was no longer res integra having been settled in C.P. Sarathy Mudaliar vs. CIT (62 ITR 576) wherein the Supreme Court had taken the view that setting aside the order of the Tribunal in exercise of the reference jurisdiction of the High Court was inappropriate. It had been observed that while hearing a reference under the Income-tax Act, the High Court exercises advisory jurisdiction and does not sit in appeal over the judgment of the Tribunal. It had been further held that the High Court had no power to set aside the order of the Tribunal even if it is of the view that the conclusion recorded by the Tribunal is not correct.

The third question that had been posed for an answer before the Supreme Court was with regard to the correctness of the manner of exercise of jurisdiction by the High Court in the present case, namely, that the evidence on record had been re-appreciated by the High Court with a view to ascertain if the conclusions recorded by the Tribunal were correct. Reliance had been placed on paragraph 16 of the judgment of the Supreme Court in the case of Sudarshan Silks and Sarees vs. CIT (300 ITR 205, 213).

The Supreme Court noted that in the present case, the High Court while hearing the reference made u/s. 256(2) of the Act had set aside the order of the Tribunal. The Supreme Court held that undoubtedly, in the exercise of its reference jurisdiction the High Court was not right in setting aside the order of the Tribunal. The Supreme Court, however, on reading the ultimate paragraph of the order of the High Court found that the error was one of form and not of substance inasmuch as the question arising in the reference had been specifically answered in the following manner: “We, therefore, set aside the order of the Tribunal and uphold that of the Commissioner (Appeals) and answer the questions in favour of the Revenue by holding that the assessee had not discharged the burden that it is entitled to deductions under section 37 of the Income-tax Act. Reference is answered accordingly.”

The Supreme Court observed that a reading of the questions initially framed and subsequently reframed showed that what was done by the High Court was to retain three out of twelve questions, as initially framed, while discarding the rest. Some of the questions discarded by the High Court were actually more proximate to the questions of perversity of the findings of fact recorded by the learned Tribunal, than the questions retained. The Supreme Court held that from a reading of the order of the High Court it was clear that the High Court examined the entitlement of the appellant assessee to deduction/ disallowance by accepting the agreements executed by the assessee with the commission agents; the affidavits filed by C. Janakiraman and Shri A. N. Ramachandra Nayar, husbands of the two lady partners of R.J. Associates and also the payments made by the assessee to R.J. Associates as well as to Golden Enterprises. The question that was posed by the High Court was whether acceptance of the agreements, affidavits and proof of payment would debar the assessing authority to go into the question whether the expenses claimed would still be allowable u/s. 37 of the Act. This was a question which the High Court held was required to be answered in the facts of each case in the light of the decision of the Supreme Court in Swadeshi Cotton Mills Co. Ltd. vs. CIT (No.1) (63 ITR 57) and Lachminarayan Madan Lal vs. CIT (86 ITR 439, 446). The High Court had noted the following observations in Lachminarayan (supra):

“The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee’s business. Although there might be such an agreement in existence and the payments might have been made. It is still open to the Incometax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37 of the Act.”

The   Supreme   Court   held   that   there   were   certain Government circulars which regulated, if not prohibited, liaisoning with the government corporations by the manufacturers for the purpose of obtaining supply orders. The true effect of the Government circulars along with the agreements between the assessee and the commission agents and the details of payments made by the assessee to the commission agents as well as the affidavits filed by the husbands of the partners of M/s. R.J. Associates were considered by the High Court. The statement of the managing director of tamil nadu State marketing  Corporation  Ltd.  (taSmaC  Ltd.),  to  whom summons were issued u/s. 131 of the Act, to the effect that M/s. Golden Enterprises had not done any liaisoning work  with  taSmaC  Ltd.  was  also  taken  into  account. the basis of the doubts regarding the very existence of R. J. Associates, as entertained by the Assessing Officer, was also weighed by the high Court to determine the entitlement of the assessee for deduction u/s. 37 of the act. In performing the said exercise the high Court did not disturb or reverse the primary facts as found by the learned tribunal. Rather, the exercise performed was one of the correct legal inferences that should be drawn on the facts already recorded by learned tribunal. The questions reframed were to the said effect. the legal inference that should be drawn from the primary facts, as consistently held by the Supreme Court, was eminently a question of law. No question of perversity was required to be framed or gone into to answer the issues arising. the questions relatable to perversity were consciously discarded by the High Court. The Supreme Court, therefore, could not find any fault with the questions reframed by the high Court or the answers provided.

Capital Gains – Status of Assessee – Compensation received on acquisition of inherited land by the Government is to be assessed in the hands of the sons in their status as “individual’s” and not jointly in the status of “Association of Persons.”

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CIT vs. Govindbhai Manaiya [(2014) 367 ITR 498 (SC)]

Capital Gains – Interest on the enhanced compensation u/s. 28 of 1894 Act is to be taxed in the year in which it is received.

The respondents were three brothers. Their father died leaving the land admeasuring 17 acres and 11 gunthas to the three brothers and two other persons who relinquished their rights in favour of the brothers. A part of this, bequeathed land was acquired by the State Government and compensation was paid for it. On appeal, the compensation amount was enhanced and additional compensation along with interest was awarded. The respondents filed their return of income for each assessment years claiming the status of “individual.” Two questions arose for consideration before the Assessing Officer. One was as to whether these three brothers could file separate returns claiming the status of the “individual” or they were to be treated as an “association of persons” (AoP). The second question was regarding the taxability of the interest on the enhanced compensation and this interest which was received in a particular year was to be assessed in the year of receipt or it could be spread over the period of time.

The Assessing Officer passed an assessment order by treating their status as that of an AOP. The Assessing Officer also refused to spread the interest income over the years and treated it as taxable in the year of receipt.

The High Court held that these persons were to be given the status of “individual” and assessed accordingly and not as an AOP and that the interest income was to be spread over from the year of dispossession of land, that is the assessment year 1987-88 till the year of actual payment which was received in the assessment year 1999-2000 applying the principles of accrual of income.

The Revenue approached the Supreme Court challenging the decision of the High Court.

The Supreme Court observed that the admitted facts were that the property in question which was acquired by the Government, came to the respondents on inheritance from their father, i.e., by the operation of law. Furthermore, even the income which was earned in the form of interest was not because of any business venture of the three assesses but it was the result of the act of the Government in compulsorily acquiring the said land. In these circumstances, according to the Supreme Court, the case was squarely covered by the ratio of the judgment laid down in Meera and Co. [(1997) 224 ITR 635 (SC)] inasmuch as it was not a case where any “association of persons” was formed by volition of the parties for the purpose of generation of income. This basic test to determine the status of AOP was absent in the present case.

In so far as the second question was concerned, the Supreme Court held that it was also covered by its another judgment in CIT vs. Ghanshyam (HUF) reported in [(2009) 315 ITR 1 (SC)] albeit, in favour of the Revenue, in which it was held that whereas interest u/s. 34 was not treated as a part of income subject to tax, the interest earned u/s. 28, which was on the enhanced compensation, was treated as a accretion to the value and, therefore, part of the enhanced compensation or consideration making it exigible to tax. After holding that interest on the enhanced compensation u/s. 28 of the 1894 Act was taxable, the court dealt with the other aspect, namely, the year of tax and answered this question by holding that it had to be taxed on receipt basis, which meant that it would be taxed in the year in which it is received.

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Search And Seizure – Block Assessment – Surcharge – The charge in respect of surcharge, having been created for the first time by insertion of proviso to section 113 was substantive provision and hence was to be construed as prospective in operation and was effective from 1st June, 2002.

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CIT vs. Vatika Township P. Ltd. [2014] 367 ITR 466 (SC)

There was a search and seizure operation u/s. 132 of the Act on the premises of the assessee on 10th February, 2001. Notice u/s. 158BC of the Act was issued to the assessee on 18th June, 2001, requiring him to file his return of income for the block period ending 10th February, 2000. In compliance, the assessee filed its return of income for the block period from 1st April, 1989 to 10th February, 2000. The block assessment in this case was completed u/s. 158BA on 28th February, 2002, at a total undisclosed income of Rs. 85,18,819. After sometime, the Assessing Office on verification of working of calculation of tax, observed that surcharge had not been levied on the tax imposed upon the assessee. This was treated as a mistake apparent on record by the Assessing Officer and, accordingly, a rectification order was passed u/s. 154 of the Act on 30th June, 2003. This order u/s. 154 of the Act, by which surcharge was levied by the Assessing Officer, was challenged in appeal by the assessee. The said order was cancelled by the Commissioner of Income Tax (Appeals)-I, New Delhi, vide order dated 10th December, 2003, on the ground that the levy of surcharge is a debatable issue and therefore, such an order could not be passed resorting to section 154 of the Act. The undisclosed income was revised u/s. 158BA/158BC by the Assessing Officer, vide his order dated 9th September, 2003, to Rs.10,90,000, to give effect to the above order of the Commissioner of Income Tax (Appeals), and thereby removing the component of the surcharge.

As the Department wanted the surcharge to be levied, the Commissioner of Income Tax (Central-I), New Delhi, issued a notice u/s. 263 of the Act to the assessee and sought to revise the order dated 9th September, 2003, passed by the Assessing Officer by which he had given effect to the order of the Commissioner of Income Tax (Appeals), and in the process did not charge any surcharge. In the opinion of the Commissioner of Income Tax, this led to income having escaped the assessment. According to the Commissioner of Income Tax, in view of the provisions of section 113 of the Act as inserted by the Finance Act, 1995, and clarified by the Board Circular No. 717, dated 14th August, 1995, surcharge was leviable on the income assessed. According to the Commissioner of Income Tax, the charging provision was section 4 of the Act which was to be read with section 113 of the Act that prescribes the rate and tax for search and seizure cases and rate of surcharge as specified in the Finance Act of the relevant year was to be applied. In this particular case, the search and seizure operation took place on 14th July, 1999, and treating this date as relevant, the Finance Act, 1999, was to be applied.

The Commissioner of Income Tax, accordingly, cancelled the order dated 9th September, 2003, not levying surcharge upon the assessee, as being erroneous and prejudicial to the interests of the Revenue. The Assessing Officer was directed by the Commissioner of Income Tax, to levy surcharge at 10 % on the amount of income-tax computed and issue revised notice of demand. The order covered the block period 1st April, 1989, to 10th February, 2000. This order of the Commissioner of Income Tax u/s. 263 of the Act was passed on 23rd March, 2004. The assessee filed the appeal before the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) against the said order of the Commissioner of Income Tax. The Tribunal, vide its order dated 23rd June, 2006, allowed the appeal of the assessee. The Tribunal held that the insertion of the proviso to section 113 of the Income-tax Act cannot be held to be declaratory or clarificatory in nature and was prospective in its operation. Against the order of the Tribunal dated 23rd June, 2006, the Revenue approached the High Court of Delhi by way of an appeal filed u/s. 260A of the Act for the block period 1st April, 1989 to 10th February, 2000. This appeal was been dismissed, vide order dated 17th April, 2007 by the High Court.

The High Court took the view that the proviso inserted in section 113 of the Act by the Finance Act, 2002, was prospective in nature and the surcharge as leviable under the aforesaid proviso could not be made applicable to the block assessment in question of an earlier period, i.e., the period from 1st April, 1989, to 10th February, 2000, in the instant case.

On further appeal, the Supreme Court noted that the issue about the said proviso to section 113, viz., whether it is clarificatory and curative in nature and, therefore could be applied retrospectively or it is to take effect from the date, i.e., 1st June, 2002, when it was inserted by the Finance Act, 2002, was considered by its Division Bench in the case of CIT vs. Suresh N. Gupta [(2008) 297 ITR 322 (SC)]. The Division Bench held that the said proviso was clarificatory in nature. However, when the instant appeal came up before another Division Bench on 6th January, 2009, for hearing, the said Division Bench expressed its doubts about the correctness of the view taken in Suresh N. Gupta and directed the Registry to place the matter before the Hon’ble the Chief Justice of India for constitution of a larger Bench.

A five judge Bench was constituted to hear the matter. The Supreme Court held that on examining the insertion of the proviso in section 113 of the Act, it was clear that the intention of the Legislature was to make it prospective in nature. This proviso could not be treated as declaratory/statutory or curative in nature. The Supreme Court observed that in Suresh N. Gupta itself, it was acknowledged and admitted that the position prior to amendment of section 113 of the Act whereby the proviso was added, whether surcharge was payable in respect of block assessment or not was totally ambiguous and unclear. The court pointed out that some Assessing Officers had taken the view that no surcharge was leviable. Others were at a loss to apply a particular rate of surcharge as they were not clear as to which Finance Act, prescribing such rates, was applicable. The surcharge varied from year to year. However, the Assessing Officers were not clear about the date with reference to which rates provided for in the Finance Act were to be made applicable. They had four dates before them, viz.:

(i) Whether surcharge was leviable with reference to the rates provided for in the Finance Act of the year in which the search was initiated;
(ii) The year in which the search was concluded; or
(iii) The year in which the block assessment proceedings u/s.158BC of the Act were initiated; or
(iv) The year in which block assessment order was passed.

In the absence of a specified date, it was not possible to levy surcharge and there could not have been an assessment without a particular rate of surcharge. The choice of a particular date would have material bearing on the payment of surcharge. Not only the surcharge was different for different years, it varied according to the category of assesses and for some years, there was no surcharge at all.

According to the Supreme Court, the rate at which the tax is to be imposed is an essential component of tax and where the rate is not stipulated or it cannot be applied with precision, it could be difficult to tax a person. In the absence of certainty about the rate because of uncertainty about the date with reference to which the rate is to be applied, it could not be said that surcharge as per the existing provision was leviable on block assessment qua undisclosed income. Therefore, it could not be said that the proviso added to section 113 defining the said date was only clarificatory in nature. The Supreme Court took note of the fact that the Chief Commissioners at their conference in 2001 accepted the position, that as per the language of section 113, as it existed, it was difficult to justify the levy of surcharge.

The Supreme Court held that the charge in respect of the surcharge, having been created for the first time by the insertion of the proviso to section 113, was clearly a substantive provision and, hence, has to be construed prospective in operation. The amendment was neither clarificatory nor was there any material to suggest that it was so intended by Parliament. Furthermore, an amendment made to a taxing statute could be said to be intended to remove “hardships” only of the assessee, not of the Department. On the contrary, imposing a retrospective levy on the assessee would have caused undue hardship and for that reason Parliament specifically chose to make the proviso effective from 1st June, 2002.

The Supreme Court overruled the Judgment of the Division Bench in Suresh N. Gupta treating the proviso as clarificatory and giving it retrospective effect.

Wealth Tax – Valuation of asset – If in the opinion of the Assessing Officer, if the value determined by the taxpayer on the basis of rules 3 to 7 is absurd or has no correlation to the fair market value or otherwise not practicable, in such a case, it is open to the Assessing Officer to invoke rule 8 of Schedule III and determine the value of the asset either under rule 20 or refer u/s. 16A, for determination of the valuation of the asset

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Amrit Banaspati Co. Ltd. vs. CIT [2014] 365 ITR 515 (SC)

The dispute before the Supreme Court related to wealthtax return of the appellant-assessee for the assessment year 1993-94. The assessee filed its return of taxable wealth at Rs.1,31,76,000 against which the assessment was completed at net wealth of Rs. 3,90,93,800. The dispute was about the valuation of the property in question being a residential flat situated in Worli, Bombay, which was owned by the assessee and used as a guest house. The immovable property was acquired by the assessee before 1st April, 1974, and the assessee filed return on self-assessment as per rules 3 to 7 of Schedule III to the Wealth-tax Act, 1957 (hereinafter referred to as the “Act”). In the course of assessment proceedings, the Assessing Officer (for short, “AO” ) was of the opinion that the value of the said flat as disclosed in the return (as Rs.1,55,139) did not appear to be in consonance with the market value for a similar size flat in Mumbai and referred the matter to the Departmental Valuation Officer under Rule 20 of Schedule III who valued the flat at Rs. 2,60,73,000. The Assessing Officer also relied upon the agreement to sell of the said flat dated 15th September, 1995, entered by the assessee with its vendor. In the said agreement, the price of the flat was shown at Rs.10,26,000. The Assessing Officer was of the opinion that due to wide variation between the alleged market value as determined by the Departmental Valuation Officer and the value as disclosed by the assessee, it was not practicable to value the property as per rules 3 to7 hence, rule 8(a) was attached.

The Assessing Office further observed that as the assessee had taken plea that it was paying rent at Rs. 500 per month prior to the purchase of the flat and incurred expenditure on the improvement of the said flat, it was difficult for the Assessing Officer to ascertain the price and, therefore, it would be impracticable to apply rule 3.

On appeal, preferred by the assessee, the Commissioner of Wealth-tax (Appeals) dismissed the appeal. The appellate order was confirmed by the Income-tax Appellate Tribunal. Thereafter, the assessee preferred a miscellaneous application u/s. 35 of the Act seeking rectification of mistakes of fact and law apparent from the Tribunal’s order. It was rejected by the Income-tax Appellate Tribunal. Finally, the High Court also affirmed the view taken by the Revenue.

Further on appeal, the Supreme Court, after referring to various provisions held that a conjoint reading of the various provisions makes it clear that the Legislature has not laid down a rigid directive on the Assessing Officer that the valuation of an asset is mandatorily required to be made by applying rule 3; the Assessing Officer has the discretionary power to determine whether rule 3 or rule 8 is applicable in a particular case. If the Assessing Officer is of the opinion that it is not practicable to apply rule 3, the Assessing Officer can apply rule 8 and value of the asset can be determined in the manner laid down in rule 20 or section 16A.

The word ‘practicable’ is to be construed widely. In the present context if in the opinion of the Assessing Officer, if the value determined by the taxpayer on the basis of rules 3 to 7 is absurd or has no correlation to the fair market value or otherwise not practicable, in such a case, it is open to the Assessing Officer to invoke rule 8 of Schedule III and determine the value of the asset either under rule 20 or refer u/s. 16A, for determination of the valuation of the asset.

The Supreme Court held that the invocation of rule 8(a) cannot be based on ipse dixit of the Assessing Officer. The discretion vested in the Assessing Officer to discard the value determined as per rule 3 has to be judicially exercised. It must be reasonable, based on subjective satisfaction; the power must be shown to be objectively exercised and is open to judicial scrutiny.

The Supreme Court observed that in the present case, the Assessing Officer refused to accept self-assessment for the following reasons:

(i) T here was a wide variation between the market value and the valuation done by the assessee as per the municipal taxes.

(ii) T he property was used as a guest house.

(iii) T he value for levy of municipal tax was very low, as the total rateable value of the assessee was done by the municipal authorities at Rs.6,573 per annum.

(iv) T he assessee was a tenant of the property at Rs.500 per month. After purchase of the property a lot of expenditure was incurred from time to time on improvement of the property which was very difficult to ascertain.

(v) T he value of the building was grossly understated as the assessee himself entered into an agreement to sell the same in the year 1995 for a sum of Rs.10,26,000.

Considering the above factors, the Assessing Officer assessed the value of the property at Rs. 2,60,73,000 as valued by the Department Valuation Officer.

The Commissioner of Wealth-tax held that the reference made by the Assessing Officer to the Department Valuation Officer was justified. The Income-tax Appellate Tribunal also justified the action of the Assessing Officer and on appeal, the same was affirmed by the High Court, vide the impugned judgment.

The Supreme Court after careful consideration of the facts and circumstances of the case and the submission made by the learned counsel for the parties, was of the opinion that the Assessing Officer was justified in holding that it was not practicable to apply rule 3 in the instant case and rightly referred the matter to the Valuation Officer u/s. 16A for determination of the value of the asset. The Assessing Officer, thereafter, has rightly assessed the wealth-tax on the basis of such value determined by the Valuation Officer. The Supreme Court did not find any merit in this appeal and the same was accordingly, dismissed.

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Capital gains –Exemption – In peculiar facts of the case, namely that the sale deed could not be executed in pursuance of agreement to sell for the reason that the assessee had been prevented from dealing with the residential house by an order of a competent court, which could not have been violated, the relief u/s. 54 should not be denied.

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Sanjeev Lal & Anr. vs. CIT & Anr. [2014] 365 ITR 389 (SC)

A residential house, being house No.267 situated in Sector 9-C, Chandigarh, was a self acquired property of Shri Amrit Lal, who had executed a Will whereby life interest in the aforesaid house had been given to his wife and upon death of his wife, the house was to be given in favour of two sons of his pre-deceased son – Late Shri Moti Lal and his widow. Upon the death of Shri Amrit Lal, possession of house was given to his widow. His widow, Smt. Shakuntala Devi expired on 29th August, 1993. Upon the death of Smt. Shakuntala Devi, as per the Will, the ownership in respect of the house in question came to be vested in the assessee and another grandchild of the late Shri Amrit Lal.

The assessee had decided to sell the house and with that intention they had entered into an agreement to sell the house with Shri Sandeep Talwar on 27th December, 2002, for a consideration of Rs.1.32 crore. Out of the said amount, a sum of Rs.15 lakh had been received by way of earnest money. As the assessee had decided to sell the house in question, he had also decided to purchase another residential house bearing house No.528 in Sector 8, Chandigarh, so that the sale proceeds, including capital gain, can be used for purchase of the aforesaid house No.528. The said house was purchased on 30th April, 2003, i.e., well within one year from the date on which the agreement to sell had been entered into by the assessee.

The validity of the Will had been questioned by Shri Ranjeet Lal, who was another son of the deceased testator, Shri Amrit Lal, by filing a civil suit, wherein the trial court, by an interim order had restrained the appellants from dealing with the house property. During the pendency of the suit, Shri Ranjeet Lal expired on 2nd December, 2000, leaving behind him no legal heirs. The suit filed by him had been dismissed in May, 2004, as there was no representative on his behalf in the suit.

Due to the interim relief granted in the above stated suit, the assessee could not execute the sale deed till the suit came to be dismissed and the validity of the Will was upheld. Thus, the assessee executed the sale deed in 2004 and the same was registered on 24th September, 2004.

Upon transfer of the house property, long-term capital gain had arisen, but as the assessee had purchase a new residential house and the amount of the capital gain had been used for purchase of the said new asset. Believing that the long-term capital gain was not chargeable to income-tax as per the provisions of section 54 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the assessee did not disclose the said long-term capital gain in his return of income filed for the assessment year 2005-06.

In the assessment proceedings for the assessment year 2005-06 under the Act, the Assessing Officer was of the view that the assessee was not entitled to any benefit u/s. 54 of the Act for the reason that the transfer of the original asset, i.e., the residential house, had been effected on 24th September, 2004, whereas the assessee had purchased another residential house on 30th April, 2003, i.e., more than one year prior to the purchase of the new asset and, therefore, the assessee was made liable to pay income-tax on the capital gain u/s. 45 of the Act.

The appeal, as far as it pertained to the benefit u/s. 54 of the Act was concerned, had been dismissed by the Commissioner of Income-tax (Appeals) and, therefore, the appellants had approached the Income-tax Appellate Tribunal. The Tribunal also upheld the orders passed by the Commissioner of Income-tax (Appeals) and, therefore, the appellants had approached the High Court by filing appeals u/s. 260A of the Act, which were dismissed. Thus, the assessee approached the Supreme Court.

The Supreme Court observed that upon plain reading of section 54 of the Act, it is very clear that so as to avail of the benefit u/s. 54 of the Act, one must purchase a residential house/new asset within one year prior or two years after the date on which transfer of the residential house in respect of which the long-term capital gain had arisen has taken place.

The Supreme Court noted that in the instant case, the following three dates were not in dispute. The residential house was transferred by the appellants and the sale deed had been registered on 24th September, 2004. The sale deed had been executed in pursuance of an agreement to sell which had been executed on 27th December, 2002, and out of the total consideration of Rs.1.32 crore, Rs.15 lakh had been received by the appellants by way of earnest money when the agreement to sell had been executed and a new residential house/new asset had been purchased by the appellants on 30th April, 2003. It was also not in dispute that there was litigation wherein the will of the late Shri Amrit Lal had been challenged by his son and the assessee had been restrained from dealing with the house in question by a judicial order and the said judicial order had been vacated only in the month of May, 2004, and, therefore, the sale deed could not be executed before the said order was vacated though the agreement to sell had been executed on 27th December, 2002.

The Supreme Court remarked that if one considers the date on which it was decided to sell the property, i.e., 27th December, 2002, as the date of transfer or sale, it cannot be disputed that the assessee would be entitled to the benefit under the provisions of section 54 of the Act, because longterm capital gain earned by the appellants had been used for purchase of a new asset/residential house on 30th April, 2003, i.e., well within one year from the date of transfer of the house which resulted into long-term capital gain.

According to the Supreme Court, the question therefore to be considered was whether the agreement to sell which had been executed on 27th December, 2002, can be considered as a date on which the property, i.e., the residential house had been transferred.

The Supreme Court held that in normal circumstances by executing an agreement to sell in respect of an immoveable property, a right in person is created in favour of the transferee/vendee. When such a right is created in favour of the vendee, the vendor is restrained from selling the said property to someone else because the vendee, in whose favour the right in personam is created, has a legitimate right to enforce specific performance of the agreement, if the vendor, for some reason is not executing the sale deed. Thus, by virtue of the question is whether the entire property can be said to have been sold at the time when an agreement to sell is entered into. In normal circumstances, the aforestated question has to be answered in the negative. However, looking at the provisions of section 2(47) of the Act, which defines the word “transfer” in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred.

Consequences of execution of the agreement to sell are also very clear and they are to the effect that the appellants could not have sold the property to someone else. in practical life, there are events when a person, even after executing an agreement to sell an immovable property in favour of one person, tries to sell the property to another. In our opinion, Such an act would not be in accordance with law because once an agreement to sell is executed  in favour of one person, the said person gets a right  to get the property transferred in his favour by filing  a suit  for specific performance and, therefore, without hesitation it could be said that some right, in respect of the said property, belonging to the assessee had been extinguished and some right had been created in favour of the vendee/ transferee, when the agreement to sell had been executed.

Thus,  a  right  in  respect  of  the  capital  asset,  viz.,  the property in question had been transferred by the assessee in favour of the vendee/transferee on 27th december, 2002. The sale deed could not be executed for the reason that the assessee had been prevented from dealing with the residential house by an order of a competent court, which they could not have violated.

In view of the aforesaid peculiar facts of the case and looking at the definition of the term “transfer” as defined u/s. 2(47) of the Act, the Supreme Court was of the view that the assessee was entitled to relief u/s. 54 of the act in respect of the long-term capital gain, which he had earned in pursuance of transfer of his residential property being house No. 267, Sector-9-C, situated in Chandigarh and used for purchase of a new asset/residential house.

Export – Deduction u/s. 80HHC – Turnover to include sale of goods dealt in and sale of scrap is not includible

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Commnr. of Income Tax-VII, New Delhi vs. Punjab Stainless Steel Industries (Civil Appeal No.5592 of 2008 dated 5th May, 2014)

The assessee was a manufacturer and exporter of stainless steel utensils. In the process of manufacturing stainless steel utensils, some portion of the steel, which could not be used or reused for manufacturing utensils, remained unused, which was treated as scrap and the respondent-assessee disposed of the said scrap in the local market and the income arising from the said sale was also reflected in the profit and loss account. The respondent-assessee not only sold utensils in the local market but also exported the utensils.

For the purpose of availing deduction u/s. 80HHC of the Act for the relevant Assessment Year, the assessee was not including the sale proceeds of scrap in the total turnover but was showing the same separately in the Profit and Loss Account.

For the purpose of calculating the deduction, according to the provisions of section 80HHC of the Act, one has to take into account the profits from the business of the assessee, export turnover and total turnover. The deduction, subject to several other conditions, incorporated in the section, is determined as under:

P_r_o_fi_ts_ _o_f _th_e_ _B_u_s_in_e_s_s_ X__ E_x_p_o_r_t _T_u_rn_o_v_e_r

Total Turnover

According to the Revenue, the sale proceeds from the scrap should have been included in the ‘total turnover’ as the respondent-assessee was also selling scrap and that was also part of the sale proceeds.

The assessee had objected to the aforestated suggestion of the Revenue because inclusion of the sale proceeds of scrap into the total turnover would reduce the amount deductible under the provisions of section 80HHC of the Act.

By virtue of the judgment delivered by the High Court, the accounting method followed by the respondent assessee had been approved and therefore, Revenue filed an appeal before the Supreme Court.

The Supreme Court observed that to ascertain whether the turnover would also include sale proceeds from scrap, one has to know the meaning of the term ‘turnover’. The term ‘turnover’ has neither been defined in the Act nor has been explained by any of the CBDT circulars.

The Supreme Court held that in the aforestated circumstances, one has to look at the meaning of the term ‘turnover’ in ordinary accounting or commercial parlance.

Normally, the term ‘turnover’ would show the sale effected by a business unit. It may happen that in the course of the business, in addition to the normal sales, the business unit may also sell some other things. For example, an assessee who is manufacturing and selling stainless steel utensils, in addition to steel utensils, the assessee might also sell some other things like an old air conditioner or old furniture or something which has outlived its utility. When such things are disposed of, the question would be whether the sale proceeds of such things would be included in the ‘turnover.’ Similarly, in the process of manufacturing utensils, there would be some scrap of stainless steel material, which cannot be used for manufacturing utensils. Such small pieces of stainless steel would be sold as scrap. Here also, the question is whether sale proceeds of such scrap can be included in the term ‘sales’ when it is to be reflected in the Profit and Loss Account.

In ordinary accounting parlance, as approved by all accountants and auditors, the term ‘sales,’ when reflected in the Profit and Loss Account, would indicate sale proceeds from sale of the articles or things in which the business unit is dealing. When some other things like old furniture or a capital asset, in which the business unit is not dealing are sold, the sale proceeds therefrom would not be included in ‘sales’ but it would be shown separately.

In simple words, the word “turnover” would mean only the amount of sale proceeds received in respect of the goods in which an assessee is dealing in. For example, if a manufacturer and seller of air-conditioners is asked to declare his ‘turnover,’ the answer given by him would show the sale proceeds of air-conditioners during a particular accounting year. He would not include the amount received, if any, from the sale of scrap of metal pieces or sale proceeds of old or useless things sold during that accounting year. This clearly denotes that ordinarily a businessman by word “turnover” would mean the sale proceeds of the goods (the things in which he is dealing) sold by him.

So far as the scrap is concerned, the sale proceeds from the scrap may either be shown separately in the Profit and Loss Account or may be deducted from the amount spent by the manufacturing unit on the raw material, which is steel in the case of the respondent assessee, as he is using stainless steel as raw material, from which utensils are manufactured. The raw material, which is not capable of being used for manufacturing utensils will have to be either sold as scrap or might have to be re-cycled in the form of sheets of stainless steel, if the manufacturing unit is also having its re-rolling plant. If it is not having such a plant, the manufacturer would dispose of the scrap of steel to someone who would re-cycle the said scrap into steel so that the said steel can be re-used.
When such scrap is sold, in according to the Supreme Court, the sale proceeds of the scrap could not be included in the term ‘turnover’ for the reason that the respondentunit is engaged primarily in the manufacturing and selling of steel utensils and not scrap of steel. Therefore, the proceeds of such scrap would not be included in ‘sales’ in the Profit and Loss Account of the respondent-assessee.

The situation would be different in the case of the buyer, who purchases scrap from the respondent-assessee and sells it to someone else. The sale proceeds for such a buyer would be treated as “turnover” for a simple reason that the buyer of the scrap is a person who is primarily dealing in scrap. In the case on hand, as the respondent-assessee was not primarily dealing in scrap but is a manufacturer of stainless steel utensils, only sale proceeds from sale of utensils would be treated as his “turnover.”

The Supreme Court referred to the “Guidance Note on Tax Audit U/s. 44AB of the Income Tax Act” published by The Institute of Chartered Accountants of India and observed that the meaning given by the ICAI clearly denotes that in normal accounting parlance the word “turnover” would mean “total sales.” The said sales would definitely not include the scrap material which is either to be deducted from the cost of raw material or is to be shown separately under a different head. The Supreme Court did not find any reason for not accepting the meaning of the term “turnover” given by a body of Accountants, which is having a statutory recognition.

For the aforesaid reasons, the Supreme Court dismissed the appeal.

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Assessment – Best judgment assessment – Assessee not very educated person, not properly represented – Supreme Court refused to interfere with assessment but directed that no interest be recovered and no penalty proceedings be initiated.

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Tripal Singh and Anr. vs. CIT & Anr. [2014] 365 ITR 511 (sc)

The dispute before the Supreme Court related to the assessment year 1998-99. The petitioner-assessee failed to appear before the assessing authority which compelled the assessing authority to complete the assessment u/s. 144 of the Income-tax Act, 1961. The said order is dated 29th December, 2005. The petitioner did not file any appeal, instead challenged the assessment order by filing a revision as provided for u/s. 264 of the Act before the Commissioner of Income-tax (Admn.), Muzaffarnagar. The memo of revision was dated 23rd May, 2006. The said revision was dismissed by the Commissioner of Income-tax on 25th March, 2008, as no one attended the office on the fixed date. Thereafter, an application to recall the said order was filed which was dated 9th June, 2008. The said application was dismissed by the order dated 26th October, 2010, on the short ground that there was no provision under the Income-tax Act for recalling the order passed u/s. 264 thereof. Feeling aggrieved, a writ petition was filed.

Before the High Court, Learned counsel for the petitioner submitted that power to pass ex-parte order included the power to recall the same notwithstanding absence of any express provision in respect thereof. He further submitted that the Commissioner of Income-tax should have decided the revision on the merits even if the petitioner could not appear on the fixed date.

The High Court held that it was not necessary to examine the proposition as to whether the Commissioner of Incometax was right in rejecting the restoration application on the ground and on the facts of the present case that he does not possess power to recall the ex-parte order. According to the High Court, even assuming that the Commissioner had power to recall the ex-parte order on the merits, it did not find that the petitioner had been able to establish sufficient cause for his non-appearance on the date fixed. The assessment order was also passed ex parte. It appeared that the petitioner was never serious to pursue his remedies under the Act and filed the revision application as a chance petition and did not prosecute it. The High Court did not find any merit in the petition.

On further appeal, the Supreme Court observed that the facts were very peculiar in this case because the appellants, who were not very educated persons, unfortunately could not be properly represented before the Assessing Officer and, therefore, the assessment was made ex-parte for the assessment year 1998-99. The Supreme Court noted that so far as the subsequent assessment years were concerned, some relief was given to the appellants-assessees by the High Court, but so far as the assessment year 1998-99 is concerned, the assessment was over and the assessment order has become final. In these circumstances, the Supreme Court was of the view that it was not proper to interfere with the assessment order. However, it directed that no penalty proceedings would be initiated and no interest would be recovered from the appellants-assessees and that the amount of tax would be paid within 60 days and if the amount was not paid within 60 days, it would be open to the authorities to charge interest on the assessed tax.

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Exemption – Educational Institute – Application for grant of certificate u/s. 10(23C)(vi) was rejected for the reason that the applicant was not using the entire income for the educational purposes – In view of the amendment to the objects, the Supreme Court set aside the orders of the High Court and authorities concerned with liberty to apply for registration afresh.

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Om Prakash Shiksha Prasar Samiti & Anr. vs. CCIT & Ors. [2014] 364 ITR 329 (SC)

The appellants had applied for grant of a certificate u/s. 10(23C)(vi) of the Income-tax Act, 1961, inter alia, requesting the authorities to grant certificate to claim exemption under the provisions of the Act. The said certificate was not granted by the authorities primarily on the ground that the appellants were not using the entire income for the educational purposes for which purpose the trust was established.

Being aggrieved by the order passed by the Chief Commissioner of Income-tax, the appellants approached the High Court. The writ petitions were dismissed by the High Court.

During the course of hearing before the Supreme Court the learned counsel for the appellants stated that the appellants had amended the objects of the society, with effect from 31st March, 2008. The Supreme Court was of the view that if that was so, the appellants should make an appropriate application before the authorities for grant of certificate u/s. 10(23C)(vi) of the Act for the assessment years 2002-03 to 2007-08 along with the amended objects of the society.

In view of this subsequent development and keeping in view of the peculiar facts and circumstances of the case, the Supreme Court set aside the order passed by the High Court and the authorities concerned and permitted the appellants to file a fresh application within a month’s time from the date of the order. The Supreme Court directed that if such application is filed within the time granted the authority would consider the same in accordance with law, keeping in view the amended objects of the society, with effect from 31st March, 2008. All the contentions of both the parties were left open by the Supreme Court.

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Recovery of tax – Garnishee notice – Stock exchange membership card is a privilege and not a property capable of attachment and the proceeds of the a card which has been auctioned cannot be paid over to Income-tax – Membership security which is handed over to the Exchange continues to be the assets of the members which can be liquidated on default – Stock Exchange has a lien over membership security and being a secured creditor, would have priority over Government Dues

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The Stock Exchange, Bombay vs. V.S. Kandalgaonkar & Ors. (2014) 368 ITR 296 (SC)

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.

Company – Book Profits – Computation – Assessee is entitled to reduce from its book profits, the profit derived from captive power plants in determining tax payable for the purposes of section 115JA

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CIT vs. DCM Sriram Consolidation Ltd. [2014] 368 ITR 720 (SC)

The assessee had four divisions, namely, Shriram Fertilizers and Chemicals, Shriram Cement Works, Shriram Alkalies and Chemicals and the textile division. In addition, the assessee also had four industrial undertakings which were engaged in captive power generation (hereinafter referred to as “CPP(s)”). Three out of the four CPPs were situated at Kota, which generated power equivalent 10 MW, 30 MW and 35 MW, respectively. The fourth CPP, at Bharuch, which was situated in the State of Gujarat, generated 18 MW power. For the purposes of setting up CPPs the assessee had taken requisite permission from the Rajasthan State Electricity Board (hereinafter referred as “ RSEB”), as well as the Gujarat State Electricity Board (hereinafter referred to as “GSEB”).

On 29th November, 1997, the assessee filed a return declaring a loss of Rs. 43,31,74,077. In a note attached to the return, the assessee had disclosed the profit and loss derived from each of the CPPs, and also indicated the formula adopted for computation of the profit derived from the respective CPPs. Briefly, the method for computation of profit and loss indicated in the note appended to the return was the rate per unit as charged by the respective State Electricity Board for transfer of power, reduced by 7% on account of absence of transmission and distribution losses (wheeling charges). From the figure obtained by applying the reconfigured rate per unit, deduction was made towards specific expenses, as well as common expenses attributable to each CPP so as to arrive at the figure of profit/loss of each CPP. In the note appended to the return of the assessee, the break up of total profit in the sum of Rs. 41,88,50,862 was detailed out in the following manner.

The assessee, however, for the purposes of the provisions of section 115JA of the Act based on its books of account, disclosed income of the sum of Rs.86,33,382. By an intimation dated 7th July, 1998, the Revenue processed the return filed by the assessee under the provisions of section 143(1)(a) of the Act. On 30th March, 1999, the assessee filed the revised return declaring a loss of Rs. 39,36,71,056. For the purposes of section 115JA of the Act, the assessee continued to show its income as Rs. 86,33,382. The case of the assessee was taken up by the Assessing Officer for scrutiny. A notice u/s. 143(2) of the Act was issued. During the course of scrutiny, the Assessing Officer raised a query with regard to the deduction of a sum of Rs. 41,88,50,862 from book profit by the assessee while computing tax u/s. 115JA of the Act. In response to the querry of the Assessing Officer, the assessee informed that the said amount has been reduced from the book profit as this amount was profit derived from CPPs set up by the assessee with the permission of the RSEB and the GSEB.

The Assessing Officer after a detailed discussion, vide order dated 24th March, 2000, rejected the claim of the assessee and added back the deduction claimed by the assessee from book profit, broadly on the following grounds:

(i) the memorandum and articles of association did not permit the assessee to engage in the business of generation of power;

(ii) the permission granted by the State Electricity Boards prohibited sale of energy so generated or supply of energy free of cost to others;

(iii) the sanction give by RSEB was only for setting up of turbo generator and not for parallel generation; and

(iv) the assessee was in the business of manufacturing fertiliser, for which purpose, it had received a subsidy as the urea manufactured was a controlled and consequently, a licensed item being subject to the retention price scheme of the Government of India which, mandated that since sale price and the distribution of urea was fully controlled, the manufacturer would be allowed a subsidy in a manner which permitted him to earn a return of 12 % on his net worth after taking into account the cost of raw material and capital employed, which included both the fixed and variable cost. From this, it was concluded that as the assessee had received a subsidy from the Government of India for manufacture of urea and as was apparent from the balance sheet and profit and loss account filed by the assessee, the CPPs were a part of the fertiliser, cement and caustic soda plants. The CPPs were included in the aforesaid plants and thus it could not be said that the income derived from the said plants, keeping in view the subsidy received by the assessee under the retention price scheme, was in any way, income derived from generation of power; and

(v) lastly, the assessee was not in the business of generation of power and that the assessee is not deriving any income from business of generation of power. A distinction was drawn between an industrial undertaking generating power and one which was in the business of generating power. The assessee’s case was likened to an undertaking which is generating power but is not in the business of generating power and, hence, not deriving income from generation of power.

The assessee being aggrieved, preferred an appeal to the Commissioner of Income-tax (Appeals). By an order dated 21st January, 2001, the Commissioner of Incometax (Appeals) allowed the appeal of the assessee with respect of the said issue.

Aggrieved by the order of the Commissioner of Incometax (Appeals), the Revenue preferred an appeal to the Tribunal. The Tribunal sustained the finding returned by the Commissioner of Income-tax (Appeals) in totality.

On further appeal by the Revenue, the High Court was of the view that the issue which required their determination was whether on a plain reading of the provisions of Explanation (iv) to section 115JA of the Act, the assessee would be entitled to reduce the book profits to the extent of profit derived fromits CPPs, while computing the MAT u/s. 115JA of the Act. According to the High Court, the entire objection of the Revenue to this claim on the assessee was pivoted on the submission that the assessee cannot derive profit from transfer of power from its CPPs to its other units for the following reasons:

(i) Firstly, there was no sale, inasmuch as, the transfer of power was not to a third party and consequently, no profits could have been earned by the assessee;

(ii) Secondly, in any event, the generation of power by CPPs would not constitute business within the meaning of Explanation (iv) to section 115JA of the Act as the main line of activity of the assessee was not the business of generation of power, an expression which finds mention in Explanation (iv) to section 115JA of the Act and;

(iii) Lastly, there was no mechanism for computing the sale price, and consequently, the profit which would be derived on transfer of energy from the assessee’s CPPs to its other units.

According to the High Court, the fallacy in the argument was self-evident, inasmuch as, counsel for the Revenue had proceeded on the basis that the words and expressions used in Explanation (iv) to section 115JA were to be confined to a situation which involved a commercial transaction with an outsider. According to the High Court , if the words and expression used in the said Explanation (iv) were to be given their plain meaning then the claim of the assessee had to be accepted.

The high Court thereafter went on to deal with each of the contentions of Revenue. To answer the first contention as to whether there could be sale of power and the resultant derivation of profits in a situation as the present one, the high Court held that one has to look no further than to the judgment of the Supreme Court in Tata Iron and Steel Co. Ltd. vs. State of Bihar [1963] 48 itr (SC) 123. Based on the ratio of the aforesaid Supreme Court decision, it was clear that in arriving at an amount that was to be deducted from book profits – which was really to the benefit of the assessee as it reduced the amount of tax which it was liable to pay under the provisions of section 115JA of the Act, the principle or apportionment of profits resting on disintegration of ultimate profits realised by the assessee by sale of the final product by the assessee had to be applied. In applying that principle it was not necessary  to depart from the principle that no  one  could  trade with himself.

When looked at from this angle, it was quite clear that the profit derived by the assessee on transfer of energy from its CPPs to its other units was “embedded” in the ultimate profit earned on sale of its final products. The assessee by taking resort to explanation (iv) to section 115JA had sought to apportion and, consequently, reduce that part of the profit which was derived from transfer of energy from its CPPs in arriving at book profits amenable to tax u/s. 115JA of the act.

As to the second contention as to whether the assessee was in the business of generation of power, based on the findings returned both by the Commissioner of Income- tax  (appeals)  as  well  as  the  tribunal,  the  high  Court held that it could not be said that the assessee is not engaged in the business. as rightly held by the tribunal, the assessee had been authorised by the State electricity Boards to generate electricity. The generation of electricity had been undertaken by the assessee by setting up a fully independent and identifiable industrial undertaking. these   undertakings   had   separate   and   independent infrastructures, which were managed independently and whose accounts were prepared and maintained separately and subjected to audit.   The term “business” which prefixes generation of power in clause (iv) of the explanation to section 115JA was not limited to one which is carried on only by engaging with an outside third party. The meaning of the word “business” as defined in section 2(13) of the act includes any trade commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The definition of “business”, which is inclusive, clearly brings within its ambit the activity undertaken by the assessee, which was, captive  generation  of  power  for  its  own  purposes.  The high Court held that the approach of the Commissioner of income-tax (appeals) and, consequently, the tribunal, both in law and on facts could not be faulted with. The High Court was of the opinion that the Assessing Officer had clearly erred in holding that, since the main business of the assessee was of manufacture and sale of urea,    it could not be said to be in the business of generation  of power in terms of explanation (iv) to section 115JA of the act.

In view of the discussion above, the high Court held   that the assessee was entitled to reduce from its book profits, the profits derived from its CPPs, in determining tax payable for the purposes of section 115JA of the act. It also concurred with the line of reasoning  adopted  both by the Commissioner of income-tax (appeals) as well as the tribunal as regards the computation of sale price  and  consequent  profits  in  terms  of  Explanation
(iv)    of section 115JA of the act. the high Court further held that it was unfair to remand the matter for the purposes of computation of profits in terms of Explanation
(iv)    u/s. 115JA of the act since the Commissioner of income-tax (appeals) had categorically recorded the facts with regard to computation and, particularly of its judgement that despite being given an opportunity by the Commissioner of income-tax (appeals) nothing had been brought on record by the Assessing Officer, which could persuade them to disagree with the computation filed   by the assessee, which had been authenticated by the assessee’s auditors.

The Supreme Court dismissed the appeal filed by the revenue holding that the principle of law propounded in Tata Iron and Steel Co. Ltd. vs. State of Bihar (supra) had rightly been applied by the high Court in the facts and circumstances of the case.

Appeal to the High Court – The High Court has the power to frame substantial questions of law at the time of hearing of the appeal other than the questions on which appeal had been admitted.

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CIT vs. Engineers India Ltd. [2014] 364 ITR 686 (SC)

The Supreme Court noted that the appeal filed by the Revenue u/s. 260A of the Income-tax Act, 1961 had been admitted by the High Court and two substantial questions of law were framed for consideration of the appeal.

The grievance of the Revenue before the Supreme Court was that by necessary implication, the other questions raised in the memo of appeal before the High Court stood rejected.

The Supreme Court held that the Revenue was under some misconception. The proviso following the main provision of section 260A(4) of the Act states that nothing stated in s/s. (4), i.e., “The appeal shall be heard only on the question so formulated” shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.

According to Supreme Court, therefore, the High Court’s power to frame substantial questions of law at the time of hearing of the appeal other than the questions on which appeal had been admitted remains u/s. 260A(4). This power is subject, however, to two conditions, (one) the court must be satisfied that appeal involves such questions, and (two) the court has to record reasons therefore.

In view of the above legal position, the Supreme Court did not find any justifiable reason to entertain the special leave petitions. Accordingly, the special leave petitions were dismissed.

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Accrual of Income – Income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay to amount.

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CIT vs. Excel Industries Ltd. and Ors. [2013] 358 ITR 295 (SC)

Advance Licence Benefit and Duty Entitlement Pass Book Benefit-Income does not accrue when the benefit becomes vested but accrues when imports are actually made. The assessee maintained its accounts on a mercantile basis. In its return (revised on 31st March, 2003) the assessee claimed a deduction of Rs. 12,57,525 under the head advance licence benefit receivable.

The assessee also claimed a deduction in respect of duty entitlement pass book benefit receivable amounting to Rs. 4,46,46,976/-. These benefits related to entitlement to import duty free raw material under the relevant import and export policy by way of reduction from raw material consumption.

According to the assessee, the amounts were excluded from its total income since they could not be said to have accrued until imports were made and the raw material consumed. During the assessment proceedings, the assessee relied upon a decision of the Income-tax Appellate Tribunal in Jamshri Ranjitsinghji Spinning and Weaving Mills Ltd. vs. IAC [1992] 41 ITD 142 (Mum) and also the order of the Commissioner of Income-tax (Appeals) in its own case for the assessment years 1995-96 to 1997-98.

By his order dated 24th March, 2004, the Assessing Officer did not accept the assessee’s claim on the ground that the taxability of such benefits was covered by section 28(iv) of the Income-tax Act, 1961 which provides that the value of any benefit or perquisite, whether convertible into money or not, arising from a business or a profession is income. According to the Assessing Officer, along with an obligation of export commitment, the assessee gets the benefit of importing raw material duty free. When exports are made, the obligation of the assessee is fulfilled and the right to receive the benefit becomes vested and absolute, at the end of the year.

In the year under consideration, the export obligation had been made and the accounting entries were based on such fulfillment. The Assessing Officer distinguished Jamshri on the ground that it pertained to the assessment year 1985-86 when the export promotion scheme was totally different and the taxability of such a benefit was examined only with reference to section 28(iv) of the Act but in the present case the taxability of such benefit was examined from all possible angles as it formed part of the profits and gains of business according to the ordinary principles of commercial accounting. The assessee took up the matter in appeal and by an order dated 15th September, 2008, the Commissioner of Income-tax (Appeals) referred to an earlier appellate order in the case of the assessee relevant to the assessment years 1999-2000 and 2000-01 and following the conclusion arrived at in those assessment year, the appeal was allowed and it was held that the advance licence benefit receivable amounting to Rs. 12,57,525 and duly entitlement pass book benefit of Rs. 4,46,46,976 ought not to be taxed in this year.

Reliance was also placed on the order of the Income-tax Appellate Tribunal in the assessee’s own case for the assessment year 1995-96. Feeling aggrieved, the Revenue preferred an appeal before the Income-tax Appellate Tribunal, which referred to the issues raised by the Revenue and by its order dated 29th April, 2011, dismissed the appeal upholding the view taken by the Commissioner of Income-tax (Appeals).

The Tribunal held that the issued were covered in favour of the asseessee by earlier orders of the Tribunal in the assessee’s own cases. It had been held by the Tribunal in the earlier cases that income does not accrue until the imports are made and raw materials are consumed by the assessee. As regards the accounting year under consideration, it was found that there was no dispute that it was only in subsequent year that the imports were made and the raw materials consumed by the assessee.

The Tribunal also took the note of the fact in the assessee’s own cases starting from the assessment year 1992-93 onwards these issues had been consistently decided in its favour. It was also noted that for some of the assessment years, namely, 1993-94, 1996-97 and 1997-98 appeals were filed by the Revenue in the Bombay High Court but they were not admitted. Under the circumstances, the Tribunal affirmed the decision of the Commissioner of Income-tax (Appeals) on the issues raised.

The Revenue then preferred an appeal under section 260A of the Act in respect of the following substantial question of law:

“Whether, on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal is justified in law in holding by following its decision in the case of Jamshri Ramjitsinghji Spinning and Weaving Mills Ltd. vs. IAC [1992] 41 ITD 142 (Mum), that advance licence benefit and the DEPB benefits are taxable in the year in which these are actually utilised by the assessee and not in the year of receipts ?” By the impugned order, the High Court declined to admit the appeal filed by the Revenue under section 260A of the Act.

On further appeal to the Supreme Court by the Revenue, the Supreme Court observed that it was well settled that Income-tax cannot be levied on hypothetical income Referring to its decision in CIT vs. Shoorji Vallabhdas and Co. (1962) 46 ITR 144 (SC) and Morvi Industries Ltd. vs. CIT (Central) (1971) 82 ITR 835 (SC) in this regards, the Supreme Court noted that it has been further held, and in its view, more importantly, that income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount”.

According to the Supreme Court therefore, income certainly accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. The Supreme Court held that, so far as the present case was concerned, even if it was assumed that the assessee was entitled to the benefits under the advance licence as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods were actually imported and made available for clearance.

The benefits represented, at best, a hypothetical income which may or may not materialise and its money value was, therefore, not the income of the assessee. Referring to its decision of Godhra Electricity Co. Ltd. vs. CIT (1997) 225 ITR 756 (SC) and applying the three tests laid down by various decisions of the apex court, namely, whether the income accrued to the assessee is real or hypothetical ; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made ; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), the Supreme Court held that, it was quite clear that in fact no real income but only hypothetical income had accrued to the assessee and section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case.

The Supreme Court further held that, as noted by the Tribunal, a consistent view had been taken in favour  of  the  assessee  on  the  questions  raised, starting  with  the  assessment  year  1992-93,  that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee, and consequently, there was no reason for if to take a different view unless there were very convincing reasons, none of which were been pointed out by the learned counsel for the Revenue.

The Supreme Court observed that, it appeared from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assess- ment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, according to the Supreme Court, the Revenue could not be allowed to flip- flop on the issue and it ought let the matter rest rather than spend the taxpayers’ money in pursuing litigation for the sake of it.

Lastly, the real question was the year in which the assessee was required to pay tax. The Supreme Court noted that there was no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, the Rev- enue had not been deprived of any tax. Further, since that the rate of  tax remained the same  in the present assessment year as well as in the subsequent assessment year, the dispute raised by the Revenue was entirely academic or at best may have a minor tax effect. According to the Supreme Court, there was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.

Interest on excess refund – Section 234D is not retrospective and does not apply to assessments that are completed prior to 01-06-2003.

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CIT vs. Reliance Energy Ltd. [2013] 358 ITR 371 (SC)

The Revenue filed a Special Leave Petition against the decision of the Bombay High Court dismissing the appeal of the Department following decision in DIT vs. Delta Air Lines Inc. (2013) 358 ITR 367 (Bom.) contending that the above decision had no applicability inasmuch as the question involved was in respect of retrospectivity of section 234D of the Act. Learned counsel for the assessee placed reliance on Explanation 2 inserted in section 234D of the Act by the Finance Act, 2012, with effect from 1st June, 2003. The Supreme Court noted that Explanation 2 which has been inserted in section 234D of the Act read as under:

“Explanation 2 – For the removal of doubts, it is hereby declared that the provisions of this section shall also apply to an assessment year commencing before the 1st day of June 2003, if the proceedings in respect of such assessment year is completed after the said date.”

The Supreme Court observed that the High Court was concerned with the appeal relating to the assessment year 1998-99. It was an admitted position that the assessment of that year was completed prior of 1st June, 2003.

The Supreme Court held that having regards to the legal position which had been clarified by Parliament by insertion of Explanation 2 in section 234D of the Act, in the present case, retrospectivity of section 234D did not arise. The Supreme Court dismissed the Special Leave Petition.

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Interest – Refund of excess of payment of tax paid u/s. 195(2) to the depositor – the assessee/ depositor is entitled to interest from the date of payment of such tax.

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Union of India vs. Tata Chemicals Ltd. [(Civil) Appeal vs. 6301 of 2011 dated 26-02-2014]

The respondent, a company, engaged in the manufacture of nitrogenous fertilizer had during the assessment year 1997-98, commissioned its naptha desulphurisation plant and to oversee the operation of the said plant it had sought the assistance of two technicians from M/s. Haldor Topsoe, Denmark. M/s. Haldor Topsoe had raised an invoice aggregating to $ 43,290/- as service charges for services of the technicians ($ 38,500/-) and reimbursements of expenses ($ 4,790/-).

The resident/deductor had approached the Incometax Officer u/s. 195 (2) of the Act, inter alia, requesting him determine as to what percentage of tax should be withheld from the amounts payable to the foreign company, namely, M/s. Haldor Topsoe, Denmark. The Assessing Officer/Income-tax Officer passed order u/s. 195 (2) of the Act directing the resident/deductor to deduct/withhold tax at the rate of 20% before remitting aforesaid amounts to M/s.Haldor Topsoe. Accordingly, the resident/deductor had deducted tax of Rs.1,98,878/- on the entire amount of $ 43,290/- and credited the same in favour of the Revenue.

After such deposit, the resident/deductor had preferred an appeal before the Commissioner of Income-tax (Appeals) against the aforesaid order passed by the Assessing Officer/Income-tax Officer u/s. 195 (2) of the Act. The appellate authority, while allowing the appeal so filed by the resident/deductor, had concluded that the reimbursement of expenses is not a part of the income for deduction of tax at source u/s. 195 of the Act and accordingly, directed the refund of the tax that was deducted and paid over to the revenue on the amount of $ 4,790/- representing reimbursement of expenses. After disposal of the appeal, the resident/deductor had claimed the refund of tax on $ 4,790/- (amounting to Rs. 22,005/-) with the interest thereon as provided u/s. 244A(1) of the Act.

The Assessing Officer/Income-tax Officer, while declining the claim made for interest, has observed that section 244A provides for interest only on refunds due to the assessee under the Act and not to the deductor and since the refund in the instant case is in view of the circulars viz. Circular No. 769 and 790 issued by the Central Board of Direct Taxes (for short, ‘the Board’) and not under the statutory provisions of the Act, no interest would accrue on the refunds u/s. 244A of the Act. Therefore, the Assessing Officer/Income-tax Officer while granting refund of the tax paid on the aforesaid amount refused to entertain the claim for interest on the amount so refunded.

Since the Assessing Officer/Income-tax Officer had declined to grant the interest on the amount so refunded, the resident/deductor had carried the matter by way of an appeal before the Commissioner of Income-tax (Appeals). The First Appellate Authority approved the orders passed by the Assessing Officer/Income-tax Officer and declined the claim of the deductor/resident on two counts: (a) that the refund in the instant case would fall under two circulars viz. Circular No. 769 and 790 issued by the Board which specifically provide that the benefit of interest u/s. 244A of the Act on such refunds would not be available to the deductor/resident and (b) that a conjoint reading of section 156 and the Explanation appended to section 244A (1)(b) of the Act would indicate that the amount refunded to the deductor/resident cannot be equated to the refund of the amount(s) envisaged u/s. 244A(1)(b) of the Act, wherein only the interest on refund of excess payment made u/s. 156 of the Act pursuant to a notice of demand issued on account of post assessment tax is contemplated and not the interest on refund of tax deposited under self-assessment as in the instant case.

The deductor/resident, aggrieved by the aforesaid order, had carried the matter before the Income-tax Appellate Tribunal (for short, ‘the Tribunal’). The Tribunal while reversing the judgment and order passed by the Commissioner of Income-tax (Appeals) has opined that the tax was paid by the deductor/resident pursuant to an order passed u/s. 195 (2) of the Act and the refund was ordered u/s. 240 of the Act. Therefore, the provisions of section 244A(1)(b) were clearly attracted and the revenue was accountable for payment of interest on the aforesaid refund amount. Accordingly, the Tribunal allowed the appeal of the deductor/resident and directed the Assessing Officer/Income-tax Officer to acknowledge the claim and allow the interest as provided u/s. 244A(1) (b) of the Act on the aforesaid amount of refund. The

Revenue being of the view that they were treated unfairly by the Tribunal had carried the matter by way of Income-tax Appeal before the High Court. The High Court refused to accept the appeal filed by the Revenue.

On further appeal by the Revenue, the Supreme Court held that the refund becomes due when tax deducted at source, advance tax paid, self-assessment tax paid and tax paid on regular assessment exceeds tax chargeable for the year as a result of an order passed in appeal or other proceedings under the Act. When refund is of any advance tax (including tax deducted/collected at source), interest is payable for the period starting from the first day of the assessment year to the date of grant of refund. No interest is, however, payable if the excess payment is less than 10% of tax determined u/s. 143(1) or on regular assessment. No interest is payable for the period for which the proceedings resulting in the refund are delayed for the reasons attributable to the assessee (wholly or partly). The rate of interest and entitlement to interest on excess tax are determined by the statutory provisions of the Act. Interest payment is a statutory obligation and non-discretionary in nature to the assessee. In tune with the aforesaid general principle, section 244A was drafted and enacted. The language employed in section 244A of the Act is clear and plain. It grants substantive right of interest and is not procedural. The principles for grant of interest are the same as under the provisions of section 244 applicable to assessments before 01-04-1989, albeit with clarity of application as contained in section 244A.

The Supreme Court further held that a “tax refund” is a refund of taxes when the tax liability is less than the tax paid. As per the old section, an assessee was entitled for payment of interest on the amount of taxes refunded pursuant to an order passed under the Act, including the order passed in an appeal. In the present fact scenario, the deductor/assessee had paid taxes pursuant to an order passed by the Assessing Officer/Income-tax Officer. In the appeal filed against the said order, the assessee had succeeded and a direction was issued by the Appellate Authority to refund the tax paid. The amount paid by the resident/deductor was retained by the Government till a direction was issued by the appellate authority to refund the same. When the said amount was refunded it should have carried interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and unauthorised retention of the money collected by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of section 244A, as that an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There was no reason to restrict the same to an assessee only without extending the similar benefit to a resident/deductor who had deducted tax at source and deposited the same before remitting the amount payable to a non-resident/foreign company.

According to the Supreme Court, providing for payment of interest in case of refund of amounts paid as tax or deemed tax or advance tax is a method now statutorily adopted by fiscal legislation to ensure that the aforesaid amount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery  provided  in  a  taxing  Statute.  refund  due and payable to the assessee is debtowed and payable by   the   revenue.   The   Government,   there   being   no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. the State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The  obligation  to  refund  money  received  and  retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex aequo et bono ought to be refunded, the right to interest follows, as a matter of course.

The Supreme Court held that in the present case, it was not in doubt that the payment of tax made by resident/ depositor was in excess and the department chose to refund the excess payment of tax to the depositor. The interest is required to be paid on such refunds. The catch however was from what date interest was payable, since the present case did not fall either under clause (a) or
(b)    of section 244a of the act. the Supreme Court held that in the absence of an express provision as contained in Clause (a), it could not be said that the interest was payable from the 1st of april of the assessment year. Simultaneously, since the said payment was not made pursuant to a notice issued u/s. 156 of the Act, Explanation to Clause(b) had no application. In such cases, as the opening words of Clause(b) specifically referred to “as in any other case,” the interest was payable from the date of  payment  of  tax. the  sequel  of  the  above  discussion according to the Supreme Court was that the resident/ deductor is entitled not only the refund of tax deposited u/s. 195(2) of the Act, but has to be refunded with interest from the date of payment of such tax.

Note:     In  the  context  of  the  liability  of  the  revenue  to  pay interest u/s. 244A, reference may also be made to the judgment of the Apex Court (Larger Bench of 3 Judges) in the case of Gujarat Fluoro Chemicals [358 ITR 291] in which the Court has held that the assessee can claim only that interest which is provided under the act and no other interest can be claimed by the assessee on statutory interest for delay in payment thereof. We have analysed this judgment in our column ‘Closements’ in the november and december issues of this journal.

Search and seizure – Block assessment – Assessment of third person – For the purpose of section 158BD of the Act a satisfaction note is sine qua non and must be prepared by the assessing officer before he transmits the records to the other assessing officer who has jurisdiction over such other person. The satisfaction note could be prepared at either of the following stages: (a) at the time of or along with the initiation of proceedings against the searched person u/s. 158BC of the Act;

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CIT vs. Calcutta Knitwears
(2014) 362 ITR 673 (SC)

A search operation u/s. 132 of the Act was carried out in two premises of the Bhatia Group, namely, M/s. Swastik Trading Company and M/s. Kavita International Company on 05-02-2003 and certain incriminating documents pertaining to the respondent assessee firm engaged in manufacturing hosiery goods in the name and style of M/s. Calcutta Knitwears were traced in the said search.

After completion of the investigation by the investigating agency and handing over of the documents to the assessing authority, the assessing authority had completed the block assessments in the case of Bhatia Group. Since certain other documents did not pertain to the person searched u/s. 132 of the Act, the assessing authority thought it fit to transmit those documents, which according to him, pertain to the “undisclosed income” on account of investment element and profit element of the assessee firm and require to be assessed u/s. 158BC read with section 158BD of the Act to another assessing authority in whose jurisdiction the assessments could be completed. In doing so, the assessing authority had recorded his satisfaction note dated 15-07-2005.

The jurisdictional assessing authority for the respondentassessee had issued the show cause notice u/s. 158BD for the block period 01-04-1996 to 05-02-2003, dated 10- 02-2006 to the assessee inter alia directing the assessee to show cause as to why should the proceedings u/s. 158BC not be completed. After receipt of the said notice, the assessee firm had filed its return u/s. 158BD for the said block period declaring its total income as Nil and further filed its reply to the said notice challenging the validity of the said notice u/s. 158BD, dated 08-03-2006. The assessee had taken the stand that the notice issued to the assessee is (a) in violation of the provisions of section 158BD as the conditions precedent have not been complied with by the assessing officer and (b) beyond the period of limitation as provided for u/s. 158BE read with section 158BD and therefore, no action could be initiated against the assessee and accordingly, requested the assessing officer to drop the proceedings.

The assessing authority, after due consideration of the reply filed to the show cause notice, had rejected the aforesaid stand of the assessee and assessed the undisclosed income as Rs. 21,76,916/- (Rs.16,05,744/- (unexplained investment) and Rs. 5,71,172/- (profit element)) by order dated 08-02-2008. The assessing officer was of the view that section 158BE of the Act did not provide for any limitation for issuance of notice and completion of the assessment proceedings u/s.158BD of the Act and therefore a notice could be issued even after completion of the proceedings of the searched person u/s. 158BC of the Act.

Disturbed by the orders passed by the assessing officer, the assessee firm had carried the matter in appeal before the Commissioner of Income-tax (Appeal- II) (for short ‘the CIT(A)’. The CIT(A), while rejecting the stand of the assessee in respect of validity of notice issued u/s. 158BD, had partly allowed the appeal filed by the assessee firm and deleted the additions made by the assessing officer in its assessments, by his order dated 27-08-2008.

The Revenue had carried the matter further by filing appeal before the Income-tax Appellate Tribunal (for short ‘the Tribunal’) and the assessee has filed cross objections therein. The Tribunal, after hearing the parties to the lis, had rejected the appeal of the Revenue and observed that recording of satisfaction by the assessing officer as contemplated u/s. 158BD was on a date subsequent to the framing of assessment u/s. 158BC in case of the searched person, that is, beyond the period prescribed u/s. 158BE(1)(b) and thereby the notice issued u/s. 158BD was belated and consequently the assumption of jurisdiction by the assessing authority in the impugned block assessment would be invalid.

Aggrieved by the order so passed by the Tribunal, the Revenue had carried the matter in appeal u/s. 260A of the Act before the High Court. The High Court, by its impugned judgment and order dated 20-07-2010, had rejected the Revenue’s appeal and confirmed the order passed by the Tribunal.

On appeal, the Supreme Court observed that section 158BD of the Act is a machinery provision and inserted in the statute book for the purpose of carrying out assessments of a person other than the searched person u/s. 132 or 132A of the Act. U/s. 158BD of the Act, if an officer is satisfied that there exists any undisclosed income which may belong to a other person other than the searched person u/s. 132 or 132A of the Act, after recording such satisfaction, may transmit the records/ documents/chits/papers etc., to the assessing officer having jurisdiction over such other person. After receipt of the aforesaid satisfaction and upon examination of the said other documents relating to such other person, the jurisdictional assessing officer may proceed to issue a notice for the purpose of completion of the assessments u/s. 158BD of the Act, the other provisions of XIV-B shall apply.

The opening words of section 158BD of the Act are that the assessing officer must be satisfied that “undisclosed income” belongs to any other person other than the person with respect to whom a search was made u/s.132 of the Act or a requisition of books were made u/s. 132A of the Act and thereafter, transmit the records for assessment of such other person. Therefore, according to the Supreme Court the short question that fell for its consideration and decision was at what stage of the proceedings should the satisfaction note be prepared by the assessing officer: Whether at the time of initiating proceedings u/s. 158BC for the completion of the assessments of the searched person u/s. 132 and 132A of the Act or during the course of the assessment proceedings u/s. 158BC of the Act or after completion of the proceedings u/s. 158BC of the Act.

The Supreme Court noted that the Tribunal and the High Court were of the opinion that it could only be prepared by the assessing officer during the course of the assessment proceedings u/s. 158BC of the Act and not after the completion of the said proceedings. The Courts below had relied upon the limitation period provided in section 158BE(2)(b) of the Act in respect of the assessment proceedings initiated u/s. 158BD, i.e., two years from the end of the month in which the notice under Chapter XIV-B was served on such other person in respect of search initiated or books of account or other documents or any assets are requisitioned on or after 01-01-1997.

The Supreme Court held that before initiating proceedings u/s. 158BD of the Act, the assessing officer who has initiated proceedings for completion of the assessments u/s. 158BC of the Act should be satisfied that there is an undisclosed income which has been traced out when a person was searched u/s. 132 or the books of accounts were requisitioned u/s. 132A of the Act. U/s. 158BD the existence of cogent and demonstrative material is germane to the assessing officers’ satisfaction in concluding that the seized documents belong to a person other than the searched person is necessary for initiation of action u/s. 158BD. The bare reading of the provision indicated that the satisfaction note could be prepared by the assessing officer either at the time of initiating proceedings for completion of assessment of a searched person u/s. 158BC of the Act or during the stage of the assessment proceedings. According to the Supreme  Court,  it  did not mean that after completion of the assessment, the assessing officer could not prepare the satisfaction note to the effect that there exists income belonging to any person other than the searched person in respect of whom a search was made u/s. 132 or requisition of books of accounts were made u/s. 132A of the Act. The language of the provision is clear and unambiguous. The legislature has not imposed any embargo on the assessing officer in respect of the stage of proceedings during which the satisfaction is to be reached and recorded in respect of the person other than the searched person.

Further, section 158BE(2)(b) only provides for the period of limitation for completion of block assessment u/s. 158BD in case of the person other than the searched person as two years from the end of the month in which the notice under this Chapter was served on such other person in respect of search carried on after 01-01-1997. According to the Supreme Court, the said section does neither provides for nor imposes any restrictions or conditions on the period of limitation for preparation of the satisfaction note u/s. 158BD and consequent issuance of notice to the other person.

In the result, the Supreme Court held that for the purpose of section 158BD of the Act a satisfaction note is sine qua non and must be prepared by the assessing officer before he transmits the records to the other assessing officer who has jurisdiction over such other person. The satisfaction note could be prepared at either of the following stages: (a) at the time of or along with the initiation of proceedings against the searched person u/s. 158BC of the Act; (b) along with the assessment proceedings u/s. 158BC of the Act; and (c) immediately after the assessment proceedings are completed u/s. 158BC of the Act of the searched person.

Income from property held for charitable or religious purposes – A charitable and religious trust which does not benefit any specific religious community would not be covered by section 13(1)(b) of the Act and would be eligible to claim exemption u/s. 11 of the Act.

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The respondent, a registered Public Trust under the M. P. Public Trusts Act, 1951, filed an application for registration before the Commissioner of Income Tax (for short, “the Commissioner”) as envisaged u/s. 12A read with section 12AA of the Act for availing the exemption u/s. 11 of the Act. The Commissioner, after affording an opportunity of hearing to the applicant, came to the conclusion that the respondent was a charitable trust but since the object and purpose of the trust was confined only to a particular religious community the same would attract the provisions of section 13(1)(b) of the Act and therefore, declined the prayer made for registration of the trust by his order dated 14-09-2007.

Aggrieved by the order so passed, the respondent carried the matter by way of an appeal before the Tribunal. The Tribunal after going through the objects of the respondent-trust came to the conclusion that the respondent was a public religious trust as the objects of the trust were wholly religious in nature and thus, the provisions of section 13(1)(b) which are otherwise applicable, in the case of the charitable trust would not be applicable and therefore, held that the respondent-trust was entitled to claim registration u/se. 12A and 12AA and accordingly, allowed the appeal and set aside the order passed by the Commissioner and further directed the Commissioner of Income-tax to grant registration u/s. 12A read with section 12AA of the Act to all the applicant-trust.

Aggrieved by the aforesaid decision passed by the Tribunal, the Revenue approached the High Court u/s. 260-A of the Act. The court primarily, was of the view that the decision of the Tribunal was rendered purely on the factual matrix of the case and therefore, it would be improper to disturb the finding of fact so arrived by the Tribunal. Secondly, the court observed that the provisions of section 13(1)(b) would not be applicable to the respondent-trust as the trust was not created or established for the benefit of any particular religious community or caste. Consequently, the court has dismissed the appeal filed by the Revenue by judgment and order dated 22-06-2009.

Disturbed by the aforesaid ruling, the Revenue approached the Supreme Court.

According to the Supreme Court, the determination of the nature of trust as wholly religious or wholly charitable or both charitable and religious under the Act was not a question of fact. It was a question which required examination of legal effects of the proven facts and documents, that is, the legal implication of the objects of the respondent-trust as contained in the trust deed. It is only the objects of a trust as declared in the trust deed which would govern its right of exemption u/s. 11 or 12. It is the analysis of these objects in the backdrop of fiscal jurisprudence which would illuminate the purpose behind the creation or establishment of the trust for either religious or charitable or both religious and charitable purpose. The Supreme Court therefore held that the High Court had erred in refusing to interfere with the observations of the Tribunal in respect of the character of the trust.

Having said so, the Supreme Court proceeded to examine the question, whether the Courts below were justified in coming to the conclusion that the respondent-trust was a public religious trust and therefore, outside the purview of section 13(1) (b) and eligible for exemption u/s. 11 of the Act.

The Supreme Court noted that the Tribunal had analysed the objects of the trust in the light of the holy scriptures and the Quran and recorded its satisfaction as follows: “16… The objects of the assessee-trust reproduced above clearly refer to the religion and are supported by reference made to different pages of Holy Quran. The learned Counsel for the assessee referred to the true copies of several pages of Holy Quran written by two of the authors referred to above in which giving of food in days of hunger or orphan is considered as highly religious ceremony. Reference is also made that who will give to the people or poor then Allah will give them in return and, i.e., who will give loan then Allah will give double to them. Likewise, for helping the needy people for religious activities and to carry out religious activities or spend for good, spending wealth in the way of Allah, bestowing mercy, teaching were considered to be highly religious activities. On going through several true pages of Holy Quran written by the authors referred to above, we are satisfied that the learned Counsel for the assessee was justified in contending that all the objects of the assesee-trust are solely religious in nature because each of them refers to religious occasions, religious education or to religious activities. The learned Counsel for the assessee also explained that the words ‘Shariat-e- Mohammadiyah’ means the path shown by prophet Mohammed. Therefore, the objects of Shariat-e- Mohammadiyah are identical with those of ‘Dawate- Hadiyah’. For Dawoodi Bohras, true path shown by the prophet is the one indicated and shown by their living guide Dai-al-Mutlaq of the time who is the living and visible guide for Dawoodi Bohras. It is an undisputed fact that for the people believing in Islam, writings in Quran are words of Allah for them. The directions given in the Holy Quran are considered by the people of Islamic faith as orders from Allah and the people of Islamic faith obey such orders as holy and religious. The learned Counsel for the assessee has been able to demonstrate that all the objects of the assessee-trust, as noted above, came out from the writings in Quran and as such these are the orders for them while observing Islamic faith.”

The Supreme Court observed that unquestionably, objects (c) and (f) which provide for the activities completely religious in nature and restricted to the specific community of the respondent-trust are objects with religious purpose only. However, in respect to the other objects, in our view the fact that the said objects trace their source to the Holy Quran and resolve to abide by the path of godliness shown by Allah would not be sufficient to conclude that the entire purpose and activities of the trust would be purely religious in colour. The objects reflects the intent of the trust as observance of the tenets of Islam, but do not restrict the activities of the trust to religious obligations only and for the benefit of the members of the community. The Privy Council in Re The Tribune, 7 ITR 415 has held that in judging whether a certain purpose is of public benefit or not, the Courts must in general apply the standards of customary law and common opinion amongst the community to which the parties interested belong to. Therefore, it is pertinent to analyse whether the customary law would restrict the charitable disposition of the intended activities in the objects.
The provision of food to the public on religious days of the community as per object (a) and (b), the establishment of Madrasa and organisations for dissemination  of  religious  education  under object
(d) and rendering assistance to the needy and poor for religious activities under object (e) would reflect the essence of charity. The objects (a) and
(b)    provide for arrangement for nyaz and majlis (lunch and dinner) on the religious occasion  of  the birth anniversary and Urs Mubarak of Awliya-e- Quiram (SA) and the Saints of the Dawoodji Bohra community and for arrangement of lunch and din- ner on religious occasions and auspicious days of the Dawoodi Bohra community, respectively. Nyaz refers to the food a person makes and offers to others on any particular occasion on the occasion of the death of a saint and Majhlis implies a place  of gathering or meeting. The activity of providing for food on certain specific occasions and other religious and auspicious events of the Dawoodi Bohra community do not restrict the benefit  to  the members of the community. Neither the religious tenets nor the objects as expressed limit  the service of food on the said occasions only to the members of the specific community. Thus, the activity of Nyaz performed by the respondent-trust does not delineate a separate class but  extends the benefit of free service  of  food  to  the  public at large irrespective of their religious, caste or sect and thereby qualifies as a charitable purpose which would entail general public utility.

Further, the establishment of the Madrasa or institutions to impart religious education to the masses would qualify as a charitable purpose qualifying under the head of education under the provisions of  section  2(15)  of  the  Act.  The  institutions  established  to  spread  religious  awareness  by  means of  education  though  established  to  promote  and further religious thought could not be restricted to religious  purposes.  The  House  of  Lords  in  Barralet vs.  IR,  54  TC  446,  has  observed  that  “the  study and  dissemination  of  ethical  principles  and  the cultivation  of  rational  religious  sentiment”  would fall  in  the  category  of  educational  purposes.  The Madrasa  as  a  Mohommedan  institution  of  teaching  does  not  confine  instruction  to  only  dissipation  of  religious  teachings  but  also  contributes  to the  holistic  education  of  an  individual.  Therefore, it  cannot  be  said  the  object  (d)  would  embody a  restrictive  purpose  of  religious  activities  only. Similarly, assistance by the respondent-trust to the needy  and  poor  for  religious  activities  would  not divest  the  trust  of  its  altruistic  character.

Therefore, the objects of  the  trust,  according to the Supreme Court, exhibited dual tenor of religious and charitable purposes and activities. Section 11 of the Act shelters such trust with composite objects to claim  exemption  from  tax  as a religious and charitable trust subject to pro- visions of section 13. The activities of the trust under such object would therefore be entitled to exemption accordingly.

According to the Supreme Court, the second issue which arose for its consideration and decision was, whether the respondent-trust was a charitable and religious trust only for the purposes of a particular community and therefore, not eligible for exemption u/s. 11 of the Act in view of provisions of section 13(1)(b) of the Act.

The Supreme Court held that in the present case, the objects of the respondent-trust  were  based  on religious tenets under the Quran according to the religious faith of Islam. As already  noticed,  the perusal of the objects and purposes of the respondent-trust clearly demonstrated that the activities of the trust though both charitable and religious were not exclusively meant for a particular religious community. The objects, as explained in the preceding paragraphs, did not channel the benefits to any community if not the Dawoodi Bohra Community and thus, would not fall under the provisions of section 13(1)(b) of the Act.

In that view of the matter, the Supreme Court  held that the respondent-trust was a charitable and religious trust which did not benefit any specific religious community and therefore, it  could  not  be held that section 13(1)(b) of the Act would be attracted to the respondent-trust and thereby, it would be eligible to claim  exemption  u/s.  11  of  the Act.

Offences and Prosecution – Section 276CC applies to situations where an assessee has failed to file a return of income as required u/s. 139 of the Act or in response to notice issued to the assessee u/s. 142 or section 148 of the Act.

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Sasi Enterprises vs. ACIT (2014) 361 ITR 163(SC)

M/s.
Sasi Enterprises was formed as a partnership firm by a deed dated 6th
February, 1989, with N. Sasikala and T. V. Dinakaram as its partners,
which was later reconstituted with effect from 4th May, 1990, with J.
Jayalalitha and N. Sasikala as partners. The firm did the business
through two units, namely, M/s. Fax Universal and M/s. J. S. Plan
Printers, which, inter alia, included the business in running all kinds
of motor cars, dealing in vehicles and goods, etc.

The
Partnership deed dated 4th May, 1990, stated that the partners, are
responsible and empowered to operate bank accounts, have full and equal
rights in the management of the firm in its business activities, deploy
funds for the business of the firm, appoint staff, watchman, etc., and
to represent the firm before Income-tax, sales tax and other
authorities.

M/s. Sasi Enterprises, the firm, did not file any returns for the assessment years 1991-92 and 1992-93.

J.
Jayalalitha and N. Sasikala filed their individual returns for the
assessment years 1991-92 and 1992- 93, though belatedly on 20th
November, 1994, and 23rd February, 1994, respectively. In those returns
it was mentioned that the accounts of the firm had not been finalised
and no returns of the firm had been filed. J. Jayalalitha and N.
Sasikala did not file returns for the assessment year 1993-94.

In
the complaint E.O.C.C. No. 202 of 1997 filed before the Chief
Metropolitan Magistrate Egmore, M/s. Sasi Enterprises was shown as the
first accused (A-1) and J. Jayalalitha and N. Sasikala were shown as
(A-2) and (A-3), respectively, who were stated to be responsible for the
day-to-day business of the firm during the assessment years in question
and were individually, jointly and severally made responsible and
liable for all the activities of the firm.

The Assistant
Commissioner of Income-tax in his complaint stated that the firm through
its partners ought to have filed its returns u/s. 139(1) of the Act for
the assessment year 1991-92 on or before 31st August, 1991, and for the
assessment year 1992-93 on or before 31st August, 1992, and A-2, in her
individual capacity, also should have filed her return for the year
1993-94 u/s. 139(1) on or before 31st August, 1993, and A-3 also ought
to have filed her return for the assessment year 1993-94 on or before
31st August, 1993, as per section 139(1) of the Act. The accused
persons, it was pointed out, did not bother to file the returns even
before the end of the respective assessment years, nor had they filed
any return at the outer statutory limit prescribed u/s. 139(4) of the
Act, i.e., at the end of March of the assessment year. It was also
pointed out the a survey was conducted in respect of the firm u/s. 133A
on 24th August, 1992, and following that a notice u/s. 148 was served on
the partnership firm on 15th February, 1994, to file the return of
Income-tax for the years in question. Though notice was served on 16th
February, 1994, no return was filed within the time granted in the
notice. Neither the return was filed, nor were particulars of the income
furnished. For the assessment year 1991-92, it was stated that
pre-assessment notice was served on 18th December, 1995, notice u/s.
142(1)(ii) giving opportunities was also issued on 20th July, 1995. The
Department made the best judgment assessment for the assessment year
1991-92 u/s. 144 on a total income of Rs. 5,84,860 on 8th February,
1996, and tax was determined as Rs. 3,02,434 and demand notice for Rs.
9,95,388 was issued as tax and interest payable on 8th February, 1996.

For
the assessment year 1992-93, the best judgment assessment u/s. 144 was
made on 9th February, 1996, on the firm on a total income of Rs.
14,87,930 and tax determined at Rs. 8,08,153, a demand notice was issued
towards the tax and interest payable.

So far as A-2 was
concerned, the due date for filing of return of income as per section
139(1) of the Act for the assessment year 1993-94 was 31st August, 1993.
Notice u/s. 142(1)(i) was issued to A-2 calling for return of income on
18th January, 1994. The said notice was served on her on 19th January,
1994. Reminders were issued on 10th February, 1994, 22nd August, 1994
and 23rd August, 1995. No return was filed as required u/s. 139(4)
before 31st March, 1995. The Department on 31st July, 1995, issued
notice u/s. 142(1)(ii) calling for particulars of income and other
details for completion of assessment. Neither the return of income was
filed nor were the particulars of income furnished. Best judgment
assessment u/s. 144 was made on 9th February, 1996 on a total income of
Rs. 1,04,49,153 and tax determined at Rs. 46,68,676 and demand of Rs.
96,98,801, inclusive of interest at Rs. 55,53,882 was raised after
adjusting pre-paid tax of Rs. 5,23,759. The Department then issued
show-cause notice for prosecution u/s. 276CC on 14th June, 1996. Later,
sanction for prosecution was accorded by the Commissioner of Income-tax
on 3rd October, 1996.

A-3 also failed to filed return of income
as per section 139(1) for the assessment year 1993-94 before the due
date, i.e., 31st August, 1993. Notice u/s. 142(1)(i) was issued to A-3
calling for filing of return of income on 8th November, 1995. Further,
notice was also issued u/s. 142(1)(ii) on 21st July, 1995, calling for
particulars of income and other details for completion of assessment.
Neither the return of income was filed nor the particulars of income
were furnished. Best judgment assessment u/s. 144 was made on 8th
February, 1996, on a total income of Rs. 70,28,110 and tax determined at
Rs. 26,86,445. The total tax payable, inclusive of interest due was Rs.
71,19,527. After giving effect to the appellate order, the total income
was revised by Rs. 19,25,000, resulting in tax demand of Rs. 20,23,279,
inclusive of interest levied. Later, a show-cause notice for
prosecution u/s. 276CC was issued to A-3 on 7th August,1996. A-3 filed
replies on 24th November, 1996, and 24th March, 1997. The Commissioner
of Income-tax accorded sanction for prosecution on 4th August, 1997.

The
final tax liability, so far as the firm was concerned, was determined
as Rs. 32,63,482 on giving effect to the order of the Income-tax
Appellate Tribunal (B-Bench), Chennai dated 1st September, 2006 and
after giving credit of prepaid tax for the assessment year 1991-92. For
the assessment year 1992-93 for the firm, final tax liability was
determined at Rs.52,47,594 on giving effect to the order of the
Income-tax Appellate Tribunal (B-Bench), Chennai dated 1st September,
2006, and after giving credit of pre-paid tax. So far as A-2 was
concerned for the assessment year 1993-94 final tax liability was
determined at Rs. 12,54,395 giving effect to the order of the Income-tax
Appellate Tribunal (B-Bench), Chennai dated 11th October, 2008, after
giving credit to pre-paid tax. So far as A-3 was concerned, for the
assessment year 1993-94, the final tax liability was determined as Rs.
9,81,870 after giving effect to the order of the Income-tax Appellate
Tribunal (B-Bench), Chennai dated 14th September, 2004, and after giving
credit to pre-paid tax.

For not filing of returns and due to
non-compliance with the various statutory provisions, prosecution was
initiated u/s. 276CC of the Act against all the accused persons and the
complaints were filed on 21st August, 1997, before the Chief
Metropolitan Magistrate which the High Court by its order dated 2nd
December, 2006 had permitted to go on by dismissing the revision
petitions filed by the firm and the two partners against the dismissal
of their discharge petitions by the Chief Metropolitan Magistrate.

On appeal, the Supreme Court held that section
276CC applies to situations where an assessee has
failed to file a return of income as required u/s.
139 of the Act or in response to notice issued to
the assessee u/s. 142 or section 148 of the Act.
The proviso to section 276CC gives some relief to
genuine assessees. The proviso to section 276CC
gives further time till the end of the assessment
year to furnish return to avoid prosecution. In
other words, even though the due date would be
31st August of the assessment year as per section
139(1) of the Act, as assessee gets further seven
months time to complete and file the return and
such a return though belated, may not attract
prosecution of the assessee. Similarly, the proviso
in Clause (ii)(b) to section 276CC also provides
that if the tax payable determined by regular assessment
as reduced by advance tax paid and tax deducted at source does not exceed Rs. 3,000,
such an assessee shall not be prosecuted for
not furnishing the return u/s. 139(1) of the Act.
Resultantly, the proviso u/s. 276CC takes care of
genuine assessees who either file the returns belatedly
but within the end of the assessment year
or those who have paid substantial amounts of
their tax dues by pre-paid taxes, from the rigour
of the prosecution u/s. 276CC of the Act.
Section 276CC, takes in s/s. (1) of the section 139,
section 142(1)(i) and section 148. But the proviso
to section 276CC takes in only s/s. (1) of section
139 of the Act and the provisions of section 142(1)
(i) or section 148 are conspicuously absent. Consequently,
the benefit of the proviso is available
only to voluntary filing of return as required u/s.
139(1) of the Act. In other words, the proviso
would not apply after detection of the failure to
file the return and after a notice u/s. 142(1)(i) or
section 148 of the Act is issued calling for filing
of the return of income. The proviso, therefore,
envisages the filing of even belated return before
the detection or discovery of the failure and issuance
of notice u/s. 142 or section 148 of the Act.
The Supreme Court referred to s/s. (4) of section
139 wherein the Legislature has used an expression
“whichever is earlier”, and observed that
both section 139(1) and s/s. (1) of section 142 are
referred to in s/s. (4) to section 139, which specify
time limit, therefore, the expression “whichever is
earlier” has to be read within the time if allowed
under s/s. (1) of section 139 or within the time allowed
under notice issued under s/s. (1) of section
142, whichever is earlier. The Supreme Court held
that so far as the present case was concerned, it
was noticed that the assessee had not filed the
return either within the time allowed under s/s. (1)
of section 139 or within the time allowed under
notice issued under s/s. (1) of section 142.
The Supreme Court noted that on failure to file
the returns by the appellants, the Income-tax Department
made a best judgment assessment u/s.
144 of the Act and later show-cause notices were
issued for initiating prosecution u/s. 276CC of the
Act. The Supreme Court held that the proviso to
section 276CC nowhere states that the offence
u/s. 276CC has not been committed by the categories
of assesses who fall within the scope of
that proviso but it is stated that such a person
shall not be proceeded against. In other words,
it only provided that under specific circumstances
mentioned in the proviso, prosecution may not be
initiated. An assessee who comes within Clause
(2)(b) of the proviso, no doubt he has also committed
the offence u/s. 276CC but is exempted
from prosecution since the tax falls below Rs.
3,000. Such an assessee may file belated return
before the detection and avail of the benefit of
the proviso. The proviso cannot control the main
section, it only confers some benefit to certain
categories of assesses. In short, the offence u/s.
276CC is attracted on failure to comply with the
provisions of section 139(1) or failure to respond
to the notice issued u/s. 142 or section 148 of the
Act within the time limit specified therein.
Applying the above principles to the facts of
the case in hand, the Supreme Court held that
the contention of the learned senior counsel for
the appellant that there has not been any willful
failure to file their return could not be accepted
and on facts, offence u/s. 276CC of the Act had
been made in all these appeals and the rejection
of the application for the discharge called for no
interference by it.
The Supreme Court also found no basis in the
contention of the learned senior counsel for the
appellant that pendency of the appellate proceeding
was a relevant factor for not initiating prosecution
proceedings u/s. 276CC of the Act. According
to the Supreme Court, section 276CC contemplates
that an offence is committed on the non-filing of
the return and it is totally unrelated to the pendency
of assessment proceedings except for the
second part of the offence for determination of
the sentence of the offence, the Department may
resort to best judgment assessment or otherwise
to past years to determine the extent of the
breach. If it was the intention of the Legislature
to hold up the prosecution proceedings till the
assessment proceedings are completed by way of
appeal or otherwise the same would have been
provided in section 276CC itself.
The Supreme Court was also of the view that the
declaration or statement made in the individual
returns by partners that the accounts of the firm
were not finalised, hence no return had been
filed by the firm, would not absolve the firm in
filing the statutory return u/s. 139(1) of the Act. The firm was independently required to file the
return and merely because there had been a best
judgment assessment u/s. 144 would not nullify
the liability of the firm to file the return as per
section 139(1) of the Act.
The Supreme Court further held that, section
278E deals with the presumption as to culpable
mental state, which was inserted by the Taxation
Laws (Amendment and Miscellaneous Provisions)
Act, 1986. The question is on whom the burden
lies, either on the prosecution or the assessee,
u/s. 278E to prove whether the assessee has or
not committed willful default in filing the returns.
The court in a prosecution of offence, like section
276CC has to presume the existence of mens rea
and it is for the accused to prove the contrary
and that too beyond reasonable doubt. Resultantly,
the appellants have to prove the circumstances
which prevented them from filing the returns as
per section 139(1) or in response to notice u/s.
142 and 148 of the Act.

Export – Deduction u/s. 80HHC – DEPB credit – Matter remanded to the Assessing Officer in accordance with the law laid down in Topman Exports.

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The assessee was a manufacturer-exporter. For the assessment year 2003-04, the assessee filed return of income on 28th November, 2003, showing a total income of Rs. 1,79,80,000. The assessee also claimed deduction u/s. 80HHC of the Act. The claim of the assessee for such deduction included consideration of Rs. 1,54,67,000 upon transfer of the DEPB credit. The Assessing Officer was of the opinion that 90 % of such sum had to be excluded for the purpose of deduction u/s. 80HHC of the Act. He framed the assessment accordingly.

The assessee approached the Commissioner of Income Tax (Appeals), who confirmed the decision of the Assessing Officer, holding that the entire amount received by the assessee towards consideration on transfer of the DEPB credits would be covered u/s. 28(iiid) of the Act. Ninety per cent of the such amount, therefore, had to be excluded for the purpose of working out of the deduction u/s. 80HHC of the Act. The Commissioner of Income Tax (Appeals) observed that the treatment to the DEPB amount should be the same as that of duty draw back. In other words, the entire amount of the DEPB credit would be covered under section 28(iiid) of the Act. The Commissioner of Income Tax (Appeals) was of the opinion that the cost of acquiring the DEPB credit to the assessee was nil.

The assessee carried the issue in appeal before the Tribunal. The Tribunal in the detailed judgment considered various aspects including the interpretation of various clauses of section 28, and in particular, clause (iiid) of section 28 and its co-relation to section 80HHC of the Act. The Tribunal was of the opinion that the face value of the DEPB would be the cost of its acquisition by the assessee. If the assessee sold such DEPB credit at a price higher than the face value, the difference would be the profit of the assessee which would be covered u/s. 28(iiid) of the Act. It is only this element which to the extent of 90 per cent be excluded for the purpose of working out section 80HHC deduction. The Tribunal also referred to Explanation (baa) to section 80HHC, by virtue of which, 90 % of the income referred to in section 28(iiid) of the Act is to be excluded from the total turnover of the assessee for the purpose of working out section 80HHC deduction.

The Revenue carried the matter to the High Court, which on combined reading of the Government of India policy providing for the DEPB benefits, the decision of the Bombay High Court in Kalpataru Colours and Chemicals (2010) 328 ITR 451 (Bom.) and the apex court, in Liberty India vs. CIT (2009) 317 ITR 218 (SC) concluded that the face value of the DEPB credit cannot be taken to be its cost of acquision in the hands of the assessee-exporter.

According to the High Court, the Tribunal committed an error in coming to the conclusion that on transfer of the DEPB credit by an assessee only the amount in excess of the face value therefore would form part of profit as envisaged in clause (iiid) of section 28.

Before the Supreme Court, the learned Additional Solicitor General for the Revenue, fairly submited that in view of the decision of the Supreme Court in Topman Exports vs. CIT [2012] 342 ITR 49 (SC), the civil appeal deserved to be allowed and the matter should be sent back to the Assessing Officer.

The Supreme Court for the reasons given in Topman Exports (supra) set aside the judgement and order of the Gujarat High Court and directed the Assessing Officer to compute the deduction u/s. 80HHC of the Income-tax Act, 1961, in the light of the observations made by it in Topman Exports.

Note: A similar decision was delivered by the Supreme Court in the case of Global Agra Products vs. ITO (2014) 360 ITR 117 (SC)

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Penalty – Concealment of Income-Voluntary disclosures do not release the assessee from the mischief of penal proceedings.

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Mak Data P. Ltd., vs. CIT (2013) 358 ITR 593 (SC)

Penalty – Concealment of Income – The Assessing Officer during the assessment proceedings, is not required to record his satisfaction for initiation of penalty proceeding in a particular manner.

The appellant-assessee filed his return of income for the assessement year 2004-05 on 27th October, 2004, declaring an income of Rs. 16,17,040 along with tax audit report. The case was selected for scrutiny and notices were issued u/s. 143(2) and 142(1) of the Income-tax Act, 1961.

During the course of the assessment proceedings, it was noticed by the Assessing Officer that certain documents comprising share application forms, bank statements, memorandum of association of companies, affidavits, copies of income-tax returns and assessment orders and blank share transfer deeds duly signed had been impounded. These documents had been found in the course of survey proceedings u/s. 133A conducted on 16th December, 2003, in the case of M/s. Marketing Services (a sister concern of the assessee). The Assessing Officer then proceeded to seek information from the assessee and issued a show-cause notice dated 26th October, 2006. By the showcause notice, the Assessing Officer sought specific information regarding the documents pertaining to share applications found in the course of survey, particularly, blank transfer deeds signed by persons, who has applied for the shares. Reply to the show-cause notice was filed on 22nd November, 2006, in which the assessee made an offer to surrender a sum of Rs. 40.74 lakh with a view to avoid litigation and buy peace and to make an amicable settlement of the dispute. Following were the words used by the assessee :

“The offer of surrender is by way of voluntary disclosure and without admitting any concealment whatsoever or any intention to conceal, and subject to non-initiation of penalty proceedings and prosecution”

The Assessing Officer after verifying the details and calculation of the share application money accepted by the company completed the assessment on 29th December, 2006 and a sum of Rs. 40,74,000 was brought to tax, as “income from other sources” and the total income was assessed at Rs. 57,56,700.

The Department initiated penalty proceedings for concealment of income and not furnishing true particulars of its income u/s. 271(1)(c) of the Income-tax Act. During the course of the hearing, the assessee contended that penalty proceedings are not maintainable on the ground that the Assessing Officer has not recorded his satisfaction to the effect that there has been concealment of income/furnishing of inaccurate particulars of income by the assessee and that the surrender of income was a conditional surrender before any investigation in the matter. The Assessing Officer did not accept those contentions and imposed a penalty of Rs. 14,61,547 u/s. 271(1)(c) of the Act. The assessee challenged that the order before the Commissioner of Income-tax (Appeals), which was dismissed.

The assessee filed as appeal before the Income-tax Appellant Tribunal, Delhi. The Tribunal recorded the following findings:

“The assessee’s letter dated November 22, 2006, clearly mentions that the offer of the surrender is without admitting any concealment whatsoever or any intention to conceal.”

The Tribunal took the view that the amount of Rs. 40,74,000 was surrendered to settle the dispute with the Department and since the assessee, for one reason or the other, agreed or surrendered certain amounts for assessment, the imposition of penalty solely on the basis of the assessee’s surrender could not be sustained. The Tribunal, therefore, allowed the appeal and set aside the penalty order.

The Revenue took up the matter in appeal before the High Court. The High Court accepted the plea of the Revenue that there was absolutely no explanation by the assessee for the concealed income of Rs. 40,74,000. The High Court took the view that in the absence of any explanation in respect of the surrendered income, the first part of clause (A) of Explanation 1 was attracted.

On appeal to the Supreme Court by the assessee, the Supreme Court fully concurred with the view of the High Court that the Tribunal has not properly understood or appreciated the scope of Explanation 1 to section 271(1)(c) of the Act.

According to the Supreme Court, the Assessing Officer should not be carried away by the plea of the assessee like “voluntary disclosure”, “buy peace”, “avoid litigation”, “amicable settlement”, etc., to explain away its conduct. The question is whether the assessee has offered any explanation for concealment of particulars of income or furnishing inaccurate particulars of income. The Explanation to section 271(1) raises a presumption of concealment, when a difference is noticed by the Assessing Officer, between reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence., that income was not concealed or inaccurate particulars were not furnished. When the initial onus placed by the explanation, has been discharged by him, the onus shifts on the Revenue to show that the amount in question constituted the income and not otherwise.

The assessee has only stated that he had surrendered the additional sum of Rs. 40,74,000 with a view to avoid litigation, buy peace and to channelise the energy and resources towards productive work and to make amicable settlement with the Income-tax Department. The statute does not recognise those types of defences under Explanation 1 to section 271(1)(c) of the Act. It is a trite law that the voluntary disclosures do not release the appellant assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty.

The Supreme Court was of the view that the surrender of income in this case was not voluntary in the sense that the offer of surrender was made in view of detection made by the Assessing Officer in a survey conducted 0n the sister concern of the assessee. In that situation, it could not be said that the surrender of income was voluntary. The Assessing Officer during the course of assessment proceedings has noticed that certain documents comprising share application, forms, bank statements, memorandum of association of companies, affidavits, copies of income-tax returns and assessment orders and blank share transfer deeds duly signed, had been impounded in the course of survey proceedings u/s. 133A conducted on 16th December, 2003, in the case of a sister concern of the assessee. The survey was conducted more than 10 months before the assessee filed its return of income. Had it been the intention of the assessee to make full and true disclosure of its income, it would have filed return declaring an income inclusive of the amount which was surrendered later during the course of the assessment proceedings. Consequently, it was clear that the assessee had no intention to declare its true income. It is the statutory duty of the assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year. In the opinion of the Supreme Court, the Assessing Officer, had recorded a categorical finding that he was satisfied that the assessee had concealed true particulars of income and was liable for penalty proceedings u/s. 271 read with section 274 of the Income-tax Act, 1961.

According to the Supreme Court, the Assessing Officer has to satisfy whether the penalty proceedings be initiated or not during the course of the assessment proceedings and the Assessing Officer is not required to record his satisfaction in a particular manner or reduce it into writing.

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Deduction u/s.80HHE in case of MAT assessment is to be worked out on the basis of adjusted book profit u/s.115JA and not on the basis of profit computed under regular provisions of the law applicable to the computation of profits and gains of business or profession.

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[CIT, Chennai v. Bhari Incomation Tech. Sys P. Ltd., {SLP (Civil) No.33750/2009 dated 20-10-2011}]

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.

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Appeal to the High Court — Delay in filing the appeal — High Court to examine the cases on merits and should not dispose of cases merely on the ground of delay.

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[CIT v. West Bengal Infrastructure Development Finance Corporation Ltd., (2011) 334 ITR 269 (SC)] Looking to the amount of tax involved in the case, the Supreme Court was of the view that the High Court ought to have decided the matter on the merits. According to the Supreme Court, in all such cases where there is delay on the part of the Department, the High Court should consider imposing costs, but certainly it should examine the cases on the merits and should not dispose of cases merely on the ground of delay, particularly when huge stakes are involved.

Accordingly, the order of the High Court was set aside and the matter was remitted to the High Court to decide the case de novo in accordance with law.

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Natural Justice — Order passed in violation of principles of natural justice should not be quashed, but the matter should be remanded to grant an opportunity of hearing.

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[ITO v. M. Pirai Choodi, (2011) 334 ITR 262 (SC)] The assessee had preferred a writ appeal against the order of the learned Single Judge dated 21st February, 2007, made in writ petition No. 3247 of 2007, where the learned Judge refused to quash the assessment order dated 29th December, 2006, for the A.Y. 2004-05 made u/s.143(3) of the Incometax Act, on the ground that the assessee had got an alternative remedy to prefer a statutory appeal before the Appellate Tribunal.

The Division Bench of the High Court observed that it is a general rule that it may not be proper to entertain the writ petition when effective alternative remedy by way of statutory appeal is available. But, the above general rule is subject to exceptions as laid by the Apex Court in Harbanslal Sahnia v. Indian Oil Corporation Ltd., (2003) 2 SCC 107, where the Apex Court has held that in spite of availability of the alternative remedy, the High Court may still exercise its writ jurisdiction in at least three contingencies: viz., (i) where the writ petition seeks enforcement of any of the fundamental rights; (ii) where there is failure of the principles of natural justice; or (iii) where the orders or proceedings are wholly without jurisdiction or the vires of an Act is challenged.

According to the High Court, the present case rightly attracted the second exception, viz., the failure of the principles of natural justice in the sense that the respondent-Department refused to admit the agricultural income of Rs.11,32,232.42 for the A.Y. 2004-05 of the assessee by placing reliance on the statement of the Village Administrative Officer, overlooking the materials furnished by the assessee to substantiate his agricultural activity, viz., (1) Chitta Adangal for the relevant periods, (2) Proof for purchase of agricultural inputs and sale of agricultural products, (3) Yearwise chart showing the expenses incurred for the agricultural activities, (4) Application of capital in the crops/herb, and (5) Books of account for business activities for the relevant period.

According to the assessee, in spite of the documentary evidence furnished to substantiate the agricultural income to the tune of Rs.11,32,232.42 for the A.Y. 2004-05, the respondent/assessing authority had chosen to overlook the same and refused to admit the said agricultural income for the A.Y. 2004-05, merely based on a statement alleged to have been obtained from the Village Administrative Officer behind the back of the assessee.

Admittedly, the assessee was not present when the statement of the Village Administrative Officer was obtained by the assessing authority. The High Court found some force in the contention of the assessee that such a statement obtained from the Village Administrative Officer behind the back of the assessee, depriving him of an opportunity to cross-examine the Village Administrative Officer, would amount to violation of the principles of natural justice and, therefore, would vitiate the assessment order.

Hence, the High Court was satisfied that there was a glaring violation of the principles of natural justice apparent on the face of the records, which fact was not properly appreciated by the learned Single Judge while dismissing the writ petition on the ground of alternative remedy. Accordingly, the High Court allowed the writ appeal and the order of the learned Single Judge was set aside. Consequently, the impugned assessment order was quashed.

On an appeal, the Supreme Court observed that in this case, the High Court had set aside the order of assessment on the ground that no opportunity to cross-examine was granted, as sought by the assessee. The Supreme Court was of the view that the High Court should not have set aside the entire assessment order. At the highest, the High Court should have directed the Assessing Officer to grant as opportunity to the assessee to cross-examine the concerned witness. The Supreme Court was of the view that even on this particular aspect, the assessee could have gone in appeal to the Commissioner of Income-tax (Appeals). The assessee had failed to avail of the statutory remedy. In the circumstances, the Supreme Court was of the view that the High Court should not have quashed the assessment proceedings vide the impugned order.

Consequently, the Supreme Court set aside the impugned order.

Liberty was however granted to the assessee to move the Commissioner of Income-tax (Appeals).

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Rectification of mistake — Tribunal should have regard to all the facts — Capital or revenue expenditure — Business loss — Loss incurred due to fluctuation of foreign exchange rate — To be decided in the light of CIT v. Woodward Governor India P. Ltd.

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[Perfetti Van Melle India (P) Ltd. v. CIT, (2011) 334 ITR 259 (SC)]

The assessment order for A.Y. 1998-99 was passed on 10th January, 2001, in which foreign exchange fluctuation loss amounting to Rs.38,30,000 was disallowed by the Assessing Officer.

The assessee filed an appeal before the Commissioner of Income-tax (Appeals) who upheld the disallowance on the ground that the exchange fluctuation related to long-term loan, and it could not be allowed as revenue expenditure.

Against the order of the Commissioner of Incometax (Appeals), the assessee filed an appeal before the Tribunal. The Tribunal vide order dated 22nd April, 2004, upheld the disallowance of loss of Rs.38,30,000.

Thereafter, the assessee filed an appeal before the High Court. While disposing of the appeal, it was observed by the High Court on 6th December, 2004, that:

“In view of paragraphs 13 and 14 of the Tribunal’s order, it is not possible for us to accept the contention that the assessee had produced books of account. It is for the Tribunal, which is a fact-finding authority, to examine the same and to record a finding. If the appellant had produced all the necessary documents in this behalf, then the Tribunal should have examined the same. In fact, in such a situation, instead of approaching this Court, the assessee ought to have moved the Tribunal u/s.254(2) of the Income-tax Act, 1961. It would be open to the appellant to move the Tribunal within 15 days from today. The appeal is disposed of accordingly.”

Thereafter, the assessee filed an application u/s. 254(2) of the Act, before the Tribunal and that application was dismissed by the Tribunal vide its order dated 15th June, 2005.

On an appeal, the High Court was of the view that ex facie, the appeal challenging two different orders passed by the Tribunal dated 22nd April, 2004, and 15th June, 2005, in one single appeal was not maintainable.

The High Court held that as far as the order dated 22nd April, 2004 was concerned, the same was challenged by the assessee by the way of appeal and vide order dated 6th December, 2004, that appeal had been disposed of by the High Court. The assessee could not reagitate the same issue again.

Coming to the order dated 15th June, 2005, passed by the Tribunal, the High Court noted that the Tribunal while dismissing the application for rectification, vide impugned order had held that:

“Our attention was invited to para 13 of the order in which the Tribunal has observed that it was for the assessee, which possesses exclusive knowledge as to the utilisation of the loan, to prove the same by leading evidence to that effect by producing the books of account and showing the entries made therein and that the assessee has not discharged this burden either before the Commissioner of Income-tax (Appeals) or before the Tribunal. It is stated that the Tribunal has noted in para 14 of the order that in A.Y. 1997-98 the assessee had filed some details and documents on the basis of which the Commissioner of Income-tax (Appeals) accepted the claim, but has gone further to record that for the year under appeal no such details were filed. The submission of the assessee before us is that the loss was allowed by the income-tax authorities in the A.Ys. 1996-97 and 1997-98 and a different treatment for the same is not warranted since the facts were the same for the year under appeal also. It is submitted that inasmuch as the Tribunal has overlooked this aspect of the matter, there is an error apparent from the record. It was alternatively submitted that the Tribunal should give a finding about the nature of the loss, whether it is capital or revenue. However, it was fairly admitted before us that this claim was not made before the income-tax authorities or before the Tribunal.”

The High Court observed that according to this order, it had been admitted before the Tribunal that the claim was not made before the incometax authorities or before the Tribunal. The Tribunal further held that:

“We have considered the matter. Given the findings of the Tribunal in paras 13 and 14 of its order, the present application cannot be accepted. It may perhaps be that the evidence produced in the earlier years was relevant for the purpose of deciding the merits of the assessee’s claim, but when the Departmental Authorities have held that for the year under appeal there was no evidence brought on record to show the utilisation of the loan, and where such a finding has been upheld by the Tribunal, the provisions of section 254(2) of the Act cannot be invoked. We do appreciate the assessee’s anxiety and it may even be open to the assessee to argue that the evidence adduced by the assessee for the earlier years would be sufficient to discharge the assessee’s burden for the year under appeal, but even if there is grievance on this score, it could not perhaps be redressed by resorting to section 254(2) of the Act. At best it may amount to an error of judgment or may even amount to the Tribunal insisting on the same evidence being formally placed on record for the year under appeal, which may appear to be ritualistic, but since the Tribunal has gone on the basis of the question of burden, it is not possible for us to accept the present application. We are also unable to give a finding as to the nature of loss, keeping in view the very fair admission that the question was not raised before the Tribunal or the income-tax authorities.”

According to the High Court, the appeal was wholly misconceived and without any basis and there was no reason to disagree with the findings given by the Tribunal and there was no infirmity in the impugned order passed by the Tribunal. The Supreme Court held that having examined the facts and circumstances of the case, which pertained to the A.Y. 1998-99, and particularly in the light of the order passed for the earlier A.Ys. 1996-97 and 1997-98, as also having regards to the assessment orders passed in the following year (1999-2000) and in view of its judgment in the case of CIT v. Woodward Governor India P. Ltd. reported in (2009) 315 ITR 254 (SC), the Tribunal was wrong in refusing to rectify its own order u/s. 254(2) of the Income-tax Act, 1961, particularly when it had failed to appreciate that in any event the expenditure could have fallen on the capital account, which was specifically pleaded by the assessee as an alternate submission.

For the aforestated reasons, the Supreme Court set aside the judgment of the High Court and the matter was remitted to the Tribunal. The Tribunal was directed to decide the matter de novo in accordance with the law laid down by the Supreme Court in the case of Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC) as well as on the merits of this case.

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Offences and prosecution — False verification in return — Since the signature on return was not disputed at the time of assessment and penalty proceedings, it amounted to admission and the accused could not have been acquitted for the reason that prosecution was not able to prove the signature of the accused.

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[ITO v. Mangat Ram Norata Ram Narwana & Anr., (2011) 336 ITR 624 (SC)]

M/s.
Mangat Ram Norata Ram is a partnership firm carrying on the business of
sale and purchase of machinery, iron pipes and spare parts. One Mr. Hem
Raj happened to be one of its partners. M/s. Mangat Ram Norata Ram
(hereinafter referred to as ‘the firm’) filed its income-tax return for
the A.Y. 1988-89 on July 14, 1988 through its counsel, which was signed
and verified by Hem Raj, its partner. The income-tax return showed the
income of the firm Rs.1,02,800. Return was accompanied by statement of
income, trading accounts, profit and loss account, partnership account
and balance sheet for the A.Y. 1988-89. The assessment was completed by
the then Income-tax Officer u/s.143(3) of the Income-tax Act for
Rs.1,47,370.

The books of account of the firm were taken into
possession by the Sales Tax Department, which were obtained by the
Income-tax Department and on its perusal, discrepancies relating to
entries of income, sale and purchase, bank account, etc., were noticed
and accordingly a notice u/s.148 of the Income-tax Act, 1961
(hereinafter referred to as ‘the Act’) was issued requiring the
respondents to furnish a revised return within 30 days. The respondents
did not comply with the notice and thereafter notice u/s.142(1) of the
Act was issued and the assessee-firm ultimately filed its incometax
return declaring its income of Rs.1,47,870. This return was said to be
duly signed and furnished by the accused Hem Raj, which was accompanied
by a revised statement of income, trading account and profit and loss
account. All these documents were also signed by the accused Hem Raj. On
consideration of the same, the Assistant Commissioner of Income-tax
made addition of Rs.1,28,000 with the trading account, Rs.1,10,000 in
the bank account and Rs.19,710 as additional income and assessed the
total income to Rs.3,68,200 and directed for initiating penalty
proceedings.

Ultimately, the minimum penalty of Rs.1,24,950 was
imposed u/s.271(1)(c) of the Act and further a sum of Rs.7,890 and
Rs.12,680 u/s.271(1)(a) of the Act. The respondent firm filed appeal
against the imposition of penalty which was dismissed by the
Commissioner of Income-tax (Appeals). The respondents had paid the
penalty inflicted on the firm.

A complaint was also lodged for
prosecution of the respondents u/s.276C(1), 277 and 278 of the Act. The
Trial Court on appraisal of the evidence held both the respondents
guilty and awarded a fine of Rs.1,000 each u/s.276C(1), 277 and 278 of
the Act to the firm, whereas, Hem Raj was sentenced to undergo rigorous
imprisonment for one year and to pay a fine Rs.1,000 on each count and
in default to suffer simple imprisonment for three months.

The
firm and Hem Raj aggrieved by their conviction and sentence preferred
appeal and the Appellate Court set aside the conviction and sentence on
the ground that sanction for prosecution was not valid. The Appellate
Court further held that the prosecution has not been able to prove the
signature of Hem Raj in the return filed, and hence, the conviction is
bad on that ground also. The Income-tax Officer aggrieved by the
acquittal of the accused preferred an appeal and the High Court by its
impugned judgment upheld the order of the acquittal and while doing so
observed that the sanction is valid but maintained the order of
acquittal on the ground that the prosecution has not been able to prove
that the return was signed/verified by Hem Raj.

On further
appeal, the Supreme Court observed that the prosecution had led evidence
to prove that the revised return was filed by the firm under the name
of the accused Hem Raj and on that basis assessment was made by the
assessing authority. There is further evidence to show that aggrieved by
the order of assessing authority, an appeal was preferred before the
Appellate Authority under the signature of the accused Hem Raj, which
was dismissed and the penalty was paid. At no point of time the accused
Hem Raj made any objection that the return did not bear his signature
and was not filed by him. It is trite that admission is the best
evidence against the maker and it can be inferred from the conduct of
the party. Admission implied by conduct is strong evidence against the
maker, but he is at liberty to prove that such admission was mistaken or
untrue. By proving conduct of the accused Hem Raj in not raising any
dispute at any point of time and paying the penalty, the prosecution has
proved his admission of filing and signing the return. Once the
prosecution has proved that, it was for the accused Hem Raj to
demonstrate that he did not sign the return. There is no statutory
requirement that signature on the return has to be made in the presence
of the income-tax authority. Nothing has been brought in evidence by the
accused Hem Raj that the signature did not belong to him on the return
and the penalty was paid mistakenly. The Supreme Court was of the view
that the Appellate Court had misdirected itself in not considering the
evidence in a right perspective and acquitting the accused, so also the
High Court which failed to correct the apparent error.

Accordingly,
the Supreme Court allowed the appeal and the impugned orders were set
aside and the judgment of conviction passed by the Chief Judicial
Magistrate was restored. However, the Supreme Court reduced the
substantive sentence from one year to six months on each count and they
were directed to run concurrently.

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Appeals to the Appellate Tribunal, High Court and Supreme Court — Circular laying down monetary limit not to apply ipso facto.

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[CIT v. Surya Herbal Ltd., SLP (CC) No. 13694 of 2011 dated 29-8-2011]

By an Instruction No. 3/2011 [F. No. 279/Misc. 142/2007-IT] dated 9-2-2011, the Central Board of Direct Taxes specified the monetary limits and other conditions for filing departmental appeals (in income-tax matters) before the Appellate Tribunal, High Courts and Supreme Court were specified as under:

As per the instructions, the appeals should not be filed in cases where the tax effect does not exceed the monetary limits given hereunder:

Sr. No. Appeals in income-tax matters Monetary limit (in Rs.)
1. Appeal before Appellate Tribunal 3,00,000
2. Appeal u/s.260A before High Court 10,00,000
3. Appeal before Supreme Court 25,00,000

It was clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits prescribed above. Filing of appeal in such cases should to be decided on merits of the case.

Paragraph 5 of the said Circular read as under:

5. “The Assessing Officer shall calculate the tax effect separately for every assessment year in respect of the disputed issues in the case of every assessee. If, in the case of an assessee, the disputed issues arise in more than one assessment year, appeal can be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issues exceeds the monetary limit specified in para 3. No appeal shall be filed in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3. In other words, henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment year. However, in case of a composite order of any High Court or Appellate Authority, which involves more than one assessment year and common issues in more than one assessment year, appeal shall be filed in respect of all such assessment years even if the ‘tax effect’ is less than the prescribed monetary limits in any of the year(s), if it is decided to file appeal in respect of the year(s) in which ‘tax effect’ exceeds the monetary limit prescribed. In case where a composite order/judgment involves more than one assessee, each assessee shall be dealt with separately.”

The Delhi High Court by its order dated 21st February, 2011 passed in ITXA No. 379 of 2011, dismissed the Revenue’s appeal for the reason that the tax effect was less than Rs.10 lakh.

On an appeal against the order of the Delhi High Court, the Supreme Court gave liberty to the Department to move the High Court pointing out that the Circular dated 9th February, 2011, should not be applied ipso facto, particularly, when the matter has a cascading effect. The Supreme Court held that there are cases under the Income-tax Act, 1961, in which a common principle may be involved in subsequent group of matters or large number of matters. The Supreme Court was of the view, that in such cases if attention of the High Court was drawn, the High Court would not apply the Circular ipso facto. For that purpose, liberty was granted to the Department to move the High Court in two weeks. The special leave petition was, accordingly, disposed of.

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Interest-tax — Supreme Court — Matter remanded for determining the questions that arose in accordance with the law.

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[Motor and General Finance Ltd. v. CIT, (2011) 334 ITR 33 (SC)] The assessee, a non-banking financial company registered with R.B.I., was engaged in the business of hirepurchase and leasing. In the return of income, 1961 it showed the following components of income:

Rs.
(A) Lease charges 40,86,85,186
(B) Hire-purchase charges 32,64,89,358
(C) Bill discounting charges 1,91,48,614

The assessee did not, however, file any return of interest under the Interest-tax Act, 1974 (for short ‘1974 Act’). The Assessing Officer served a letter on the assessee asking the assessee to explain the reasons for not filing the Interest-tax return for the A.Y. 1995-96. A reply was filed by the assessee requesting the Assessing Officer to withdraw his letter, as the assessee claimed that it was not liable to file returns under the 1974 Act. On 31st March, 2005, a notice u/s. 10 of the 1974 Act was served on the assessee calling upon it to file its return of interest. According to the Assessing Officer, the interest chargeable to tax had escaped assessment. According to the Assessing Officer, on a perusal of the income-tax return of the assessee for the A.Y. 1995-96, it was found that the assessee was engaged in financial activities; that it had income from net hire-purchase charges, lease charges and bill discounting charges as indicated hereinabove. Since the assessee did not file the required return of chargeable interest the Assessing Officer assessed the chargeable interest by way of best judgment assessment u/s. 8(3) of the 1974 Act. The total interest chargeable, according to the Assessing Officer, was Rs.75,43,23,158. One of the issues which arose for determination was whether the transactions undertaken by the assessee were in the nature of hire-purchase and not in the nature of financing transactions. According to the assessee, there is a dichotomy between financing transactions and hire-purchase transactions. According to the assessee, its principal business was of leasing. For the aforestated reasons, the assessee contended that it was not covered by the definition of ‘financial company’ u/s. 2(5B) of the 1974 Act. On examination of the facts of the case and looking into all the parameters, including the parameter of the principal business, such as turnover, capital employed, etc., it was held by the Commissioner of Income-tax (Appeals) that the assessee carried on hire-purchase business activity and bill discounting activity as the principal business and, therefore, the assessee constituted a ‘credit institution’ as defined u/s. 2(5A) of the 1974 Act and was, therefore, taxable under the 1974 Act. However, after coming to the conclusion that the reopening of the proceedings was valid and that the assessee constituted a credit institution, the Commissioner of Income-tax (Appeals) went into the merits of the case and came to the conclusion that the transactions entered into by the assessee were not financing transactions, as the ownership of the vehicle in each case remained with the assessee; that the hirer did not approach the assessee after purchasing the vehicles; that the vehicle stood purchased by the assessee and let out to the hirer for use on payment of charges. Consequently, the Commissioner of Income-tax (Appeals) held that the hire-purchase transactions of the assessee were not financing transactions or loan transactions and, therefore, the Assessing Officer, was not justified in bringing to tax hire-purchase charges of Rs.32,64,89,358. The Commissioner of Income-tax (Appeals), however, held that the Assessing Officer was justified in treating receipts from bill discounting charges of Rs.1,91,48,614 as ‘chargeable interest’ under the 1974 Act. Lastly the Commissioner of Income-tax (Appeals) held that the lease transaction undertaken by the assessee and the lease charges received by it did not fall within the ambit of section 2(7) of the 1974 Act because the Department had accepted the case of the assessee that it remained the owner of the leased assets for all times to come and, therefore, it was not open for the Department to say that charges received for leasing the vehicles are financial charges exigible to the Interest-tax Act, 1974. Consequently, the Commissioner of Income-tax (Appeals) came to the conclusion that the Assessing Officer had erred in bringing to tax lease rental charges of Rs.40,86,85,186 as chargeable interest under the 1974 Act.

Aggrieved by the decision of the Commissioner of Income-tax (Appeals) the assessee as well as the Department went in appeal(s) to the Tribunal which held that the Department was justified in confirming the validity of action u/s. 10 of the 1974 Act. On the question as to whether the assessee was a ‘financial company’ as defined u/s. 2(5B), it was held that the assessee was not a finance company and therefore it did not fall within the definition of ‘credit institution’ as envisaged in section 2(5A) of the 1974 Act and, therefore, it fell outside the purview of the 1974 Act. That, bill discounting charges was taxable under the 1974 Act. That the plea of the assessee that such charges were not covered by the definition of the word ‘interest’ was not acceptable. Consequently, the appeals filed by the assessee were partly allowed. In the Department’s counter-appeal the Tribunal held on examination of the transaction in question that the Commissioner of Income-tax (Appeals) was right in holding that the hire-purchase agreement in the present case was not a financing transaction. Similarly, on examining the lease transaction undertaken by the assessee, the Tribunal held that the asset owned by the lessor was given to the lessee for use only and therefore the Commissioner of Income-tax (Appeals) was fully justified in holding that the receipt on account of lease charges was not taxable as finance charges or interest under the 1974 Act.

Aggrieved by the decision of the Tribunal, the Department carried the matter in appeal to the Delhi High Court u/s. 260A of the Income-tax Act, 1961. The appeal was allowed by the High Court, it was held by the High Court that the Tribunal had erred in holding that for deciding the principal business of a taxable entity under the 1974 Act only the receipt from business is the criteria and the other parameters such as turnover, capital employed, the head count of persons employed, etc. were not relevant. Accordingly, the Tribunal’s decision stood set aside. The High Court also remitted the case to the Assessing Officer saying that it was not clear from the material produced before the Court as to whether the lease agreements entered into by the assessee were financial lease or operational leases or both.

Aggrieved by the decision of the High Court, the assessee went to the Supreme Court by way of civil appeals. The Supreme Court was of the view that the High Court had not examined whether the transaction entered into by the assessee constituted financial transactions so as to attract the provisions of the 1974 Act. The Supreme Court noted that the Commissioner of Income Tax had examined the nature of the transactions entered into by the assessee and the three components of the receipt of the assessee under 1974 Act. According to the Supreme Court the main question which arose for determination in this case was whether the receipt from lease charges, from net hire-purchase charges and bill discounting charges could be taxed under the 1974 Act. This was apart from the question as to whether the assessee which was a non-banking financial company was a credit institution u/s. 2(5A) of the 1974 Act. The Supreme Court was of the view that the matter needed reconsideration and hence set aside the judgment of the High Court with a direction to decide the matter in accordance with law.

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Transfer pricing — Foundational facts were not established — Assessee relegated to adopt proceedings that were pending before various authorities and each of the authorities to decide the matter uninfluenced by the observation of the High Court.

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[Coca Cola India Inc. v. ACIT & Ors., (2011) 336 ITR 1 (SC)]

The petitioner, a company incorporated under the laws of the United States of America and thus a foreign company u/s. 2(23A) of the Act, had a branch office in India. It was a part of the International Coca Cola corporate group. The said group had other companies operating in India incorporated under the Companies Act, 1956. The petitioner obtained permission u/s. 29(1)(a) of the Foreign Exchange Regulation Act, 1973, (FERA) to operate a branch office in India to render a services to the Coca Cola group companies, as per conditions mentioned in the application for the said permission. There is a service agreement between the petitioner on the one hand and Britco Foods Company Private Limited (Britco) on the other.

As per the said agreement, the petitioner provides advisory services to Britco to advise, monitor and co-ordinate the activities of bottlers, in consideration of which the petitioner receives fee calculated on the basis of actual cost plus 5%. The petitioner was assessed under the Act for the A.Y. 1998-99 on 31st March, 2004. The Assessing Officer, however, formed an opinion that income of the petitioner, chargeable to tax for the said year, had escaped assessment within the meaning of section 147 of the Act. A notice dated 30th March, 2005, was issued u/s. 148 of the Act, requiring the petitioner to file a return and thereafter, some further information was sought from the petitioner for the purpose of assessment. The petitioner filed reply to the said notice, seeking reasons for the proposed reassessment.

The reasons indicated that the Assessing Officer referred to section 92 of the Act, which enables the Assessing Officer to determine profits which may reasonably deemed to have been derived, when less than ordinary profits are shown to have been derived by a resident. It was further stated in the said reasons that as per the order dated 7th February, 2005, u/s. 92CA(3) for the A.Y. 2002- 03, passed by the Transfer Pricing Officer-1, the profit declared by the petitioner was abnormally low, on account of which arm’s-length price had been fixed. On that account, the income of the assessee had escaped assessment. Similar notices were issued for the A.Ys. 1999-2000, 2000-01 and 2001-02. On 14th July, 2005, notice u/s. 92CA(3) of the Act was issued by the Additional Commissioner of Income-tax acting as Transfer Pricing Officer, on a reference made by the Assessing Officer u/s. 92CA(1) of the Act for the A.Y. 2003-04, to determine arm’s-length price. Identical notices were issued for the A.Ys. 2004-05, 2005-06 and 2006-07.

The Assesssing Officer made assessment in respect of income of the petitioner for the A.Y. 2002-03, vide order dated 24th March, 2005, after getting determined arm’s-length price of services rendered by the petitioner to its associated company, thereby enhancing the income of the assessee. Against the said order, the petitioner preferred an appeal which is pending before the appropriate authority. The petitioner filed a writ petition before the Punjab & Haryana High Court on 19th October, 2005. On 21st October, 2005, notice was issued to the respondents and, vide order dated 18th November, 2005, stay of passing of final order for the A.Ys. 2003-04, 2004-05, 1998-99 to 2001-02 was granted. Similarly, on 15th December, 2006, stay of passing final order for the A.Y. 2005-06 was granted and permission to amend the petition was also granted to challenge the notice in respect of the said year.

Similarly, on 26th May, 2008, stay of passing of final order for the A.Y. 2006-07 was granted. The petitioner further amended the petition to challenge the notice in respect of the A.Y. 2006-07, which amendment had been allowed by a separate order. The main contention raised in the writ petition was that the provisions of Chapter X, i.e., section 92 to 92F of the Act have been enacted with a view to prevent diversion of profits in intra-group transactions leading to erosion of tax revenue. The said provisions have been incorporated, vide Finance Act, 2001, and further amended, vide Finance Act, 2002. Having regard to the object for which the provisions have been enacted, applicability of the said provisions has to be limited to situations where there is diversion of profits out of India or where there may be erosion of tax revenue in intra-group transaction. In the present case, there was neither any material to show diversion of profits outside India, nor of erosion of tax revenue. If the price charged was less and profit of the petitioner was less, there was corresponding lesser claim for deduction by Britco.

Question of diversion of profits out of India would arise only if price charged is higher and that too if the higher profit was not subject to tax in India, which was not the situation in the present case. Further contention was that there was no occasion for determining arm’s-length price as the price determined by the petitioner itself was as per section 92(1) and (2) of the Act, i.e., cost plus 5%. In such a situation, there was no occasion to make reference to the Transfer Pricing Officer. Even if the reference was sought to be made, the petitioner was entitled to be heard before such a decision is taken, so that it could show that reference to the Transfer Pricing Officer was not called for. In objecting to the notices for reassessment, contention raised was that the provisions of Chapter X having been introduced only from 1st April, 2002, there could be no reassessment for the period from April 1, 1997, to 31st March, 2001. It was pointed out that prior to the amendment with effect from April 1, 2002, u/s. 92 of the Act, there was a provision for determination of reasonable profits deemed to have been derived by a resident and not a ‘non-resident’.

The amended provision could not be applied to the petitioner for the period prior to 31st March, 2001. In the reply filed on behalf of the respondents, the impugned notices and orders were defended. As regards the period prior to the A.Y. 2002-03, when the amended provisions of Chapter X were not operative, the stand of the respondents was that the petitioner suppressed its profit in its transactions with its associated companies, which was clear from the proportion of amount of working capital employed to the declared profit and this resulted in escapement of income within the meaning of section 147 of the Act. As regards the period for and after the A.Y. 2002- 03, it was submitted that the said Chapter was applicable to the petitioner as the petitioner had entered into ‘international transaction’ within the meaning of the said provisions with its ‘associated enterprises’. There was no condition that the said Chapter could apply only if the parties were not subject to the tax jurisdiction in India. The only requirement is that at least one of the parties should be non-resident, apart from other requirements in the said Chapter.

According to the High Court the following questions arose for its consideration: “

(i) Whether inapplicability of the unamended provisions of section 92 of the Act (as it stood prior to 1st April 1, 2002) to the petitioner created a bar to reassessment of escaped income of the petitioner?

(ii) Whether the order passed by the Transfer Pricing Officer under Chapter X after 1st April, 2002, could be one of the reasons for reassessment for period prior to introduction of the amended Chapter X in the Act?

(iii) Whether the provisions of Chapter X are attracted when both the parties to a transaction are subject to tax in India, in the absence of allegation of transfer of profits out of India or evasion of tax?

(iv) Whether opportunity of being heard is required before referring the matter of determination of arm’s-length price to the Transfer Pricing Officer?”
The above questions framed by the High Court were dealt by it as under:

Re: Question No. (i)

The High Court noted that the objection of the petitioner was twofold: (a) Reference to inapplicable provisions of section 92 of the Act, as it stood prior to the amended with effect from 1st April, 2002, and (b) irrelevance of the order of the Transfer Pricing Officer under Chapter X passed in respect of a subsequent assessment year.

The High Court held that section 147 of the Act requires formation of opinion that income has escaped assessment. The said provision is not in any manner controlled by section 92 of the Act, nor is there any limit to consideration of any material having nexus with the opinion on the issue of escapement of assessment of income. Interference with the notice for reassessment is called for only where extraneous or absurd reasons are made the basis for opinion proposing to reassess. Apart from the fact that the Assessing Officer had given other reasons, it cannot be held that the material relied upon by the Assessing Officer for proposing reassessment was irrelevant. Whether or not the said material should be finally taken into account for reassessment was a matter which had to be left open to be decided by the Assessing Officer after considering the explanation of the assessee. The High Court was of the view that having regard to the relationship of the petitioner to its associate company, it could not be claimed that the price mentioned by it must be accepted as final and may not be looked at by the Assessing Officer.

Reg: Question No. (ii)

As regards the question whether order of the Transfer Pricing Officer could be taken into account, the High Court was of the view that there could not be any objection to the same being done. Requirement of section 147 of the Act is fulfilled if the Assessing Officer can legitimately form an opinion that income chargeable to tax has escaped assessment. For forming such opinion, any relevant material can be considered. The order of Transfer Pricing Officer can certainly have nexus for reaching the conclusion that income has been incorrectly assessed or has escaped assessment. The High Court observed that in the present case, the said material came to the notice of the Assessing Officer subsequent to the assessment. There was no grievance that the provisions of section 148 to 153 of the Act had not been followed. In such a situation, it could not be held that the notice proposing reassessment was vitiated merely because one of the reasons referred to the order of the Transfer Pricing Officer.

Reg: Question No. (iii)

The High Court did not find any ambiguity or absurd consequence of application of Chapter X to persons who were subject to jurisdiction of taxing authorities in India, nor could find any statutory requirement of establishing that there was transfer of profits outside India or there was evasion of tax. The only condition precedent for invoking provisions of Chapter X was that there should be income arising from international transaction and such income had to be computed having regard to arm’s-length price. ‘International transaction’ as defined u/s. 92B of the Act, stood on different footing than any other transaction. Arm’s -length price was nothing but a fair price which would have been normal price. There was always a possibility of transaction between a non-resident and its associates being undervalued and having regard to such tendency, a provision that income arising out of the said transaction could be computed having regard to arm’s-length price, would not be open to question and was within the legislative competence to effectuate the charge of taxing real income in India.

The High Court did not find any merit whatsoever in the contention that provisions of Chapter X could not be made applicable to parties which were subject to jurisdiction of taxing authorities in India, without there being any material to show transfer of profits outside India or evasion of tax between the two parties. The contention that according to the permission granted by the Reserve Bank of India under the Foreign Exchange Regulation Act, the assessee could not charge more than particular price, could also not control the provisions of the Act, which provides for taxing the income as per the said provision or computation of income, having regard to arm’s-length price in any international transaction, as defined.

Reg: Question No. (iv)

The High Court held that when it is a matter of assessment by one or other officer and the assessee is to be provided opportunity, in the course of the assessment, there was no merit for inferring further opportunity at the stage of decision of the question, whether the Assessing Officer himself is to compute the arm’s-length price or to make a reference to the Transfer Pricing Officer for the said purpose.

On an appeal, the Supreme Court observed that the issue in the Special Leave Petition concerned the
 

application of the principle of transfer pricing. In this case a notice was issued u/s. 148 of the Act for some of the assessment years. On the question of jurisdiction, a writ petition was filed by the assessee, which was disposed of by the High Court in the writ jurisdiction. The Supreme Court, however, on going through the papers, found that foundational facts were required to be established, which could not have been done by way of writ petition. For the aforestated reasons, the Supreme Court was of the view that the assessee should be relegated to adopt proceedings, which were pending, as of date, before various authorities under the Act.

The Supreme Court accordingly, directed the authorities to expeditiously hear and dispose of pending proceedings as early as possible. If the petitioner- assessee was aggrieved by the orders passed by any of these authorities, it would have to exhaust the statutory remedy provided under the Act. It was made clear that each of the authorities would decide the matter uninfluenced by any of the observations made by the High Court.

The special leave petition was disposed of accordingly.

International transactions — Transfer price — Arm’s-length price — Order of remand of the High Court modified so that the TPO would be uninfluenced by the observations given by the High Court.

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[Maruti Suzuki India Ltd. v. ACIT, (2011) 335 ITR 121 (SC)]

The petitioner before the Delhi High Court, formerly known as Maruti Udyog Limited (hereinafter referred to as ‘Maruti’), was engaged in the business of manufacture and sale of automobiles, besides trading in spares and components of automotive vehicles. The petitioner launched ‘Maruti 800’ car in the year 1983 and thereafter launched a number of other models, including Omni in the year 1984 and Esteem in the year 1994. The trade mark/logo ‘M’ was the registered trade mark of the petitioner-company.

Since Maturi wanted a licence from Suzuki for its SH model and Suzuki had granted licence to it, for the manufacture and sale of certain other models of Suzuki four-wheel motor vehicles, Maruti, on 4th December, 1992, entered into a licence agreement, with Suzuki Motor Corporation (thereinafter referred to as ‘Suzuki’) with the approval of the Government of India.

Prior to 1993, the petitioner was using the logo ‘M’ on the front of the cars manufactured and sold by it. From 1993 onwards, the petitioner started using the logo ‘S’, which is the logo of Suzuki, in the front of new models of the cars manufactured and sold by it, though it continued to use the mark ‘Maruti’ along with the word ‘Suzuki’ on the rear side of the vehicles manufactured and sold by it.

A reference u/s. 92CA(1) was made by the Assessing Officer of the petitioner, to the Transfer Pricing Officer (hereinafter referred to as ‘TPO’) for determination of the arm’s-length price for the international transactions undertaken by Maruti with Suzuki in the financial year 2004-05. A notice dated 27th August, 2008, was then issued by the TPO, to the petitioner with respect to replacement of the front logo ‘M’, by the logo ‘S’, in respect of three models, namely, ‘Maruti’ 800, Esteem and Omni in the year 2004-05, which, according to the TPO, symbolised that the brand logo of Maruti had changed to the brand logo of Suzuki. It was stated in the notice that Maruti having undertaken substantial work towards making the Indian public aware of the brand ‘Maruti’, that brand had become a premier car brand of the country. According to the TPO, the change of brand logo from ‘Maruti’ to ‘Suzuki’, during the year 2004-05, amounted to sale of the brand ‘Maruti’ to ‘Suzuki’. He noticed that Suzuki had taken a substantial amount of royalty from Maruti, without contributing anything towards brand development and penetration in Indian Market. It was further noted that Maruti had incurred expenditure amounting to Rs.4,092 crore on advertisement, marketing and distribution activity, which had helped in creation of ‘Maruti’ brand logo and due to which Maruti had become the number one car company in India. Computing the value of the brand at cost plus 8% method, he assessed the value of the brand at Rs.4,420 crore. Maruti was asked to show cause as to why the value of Maruti brand be not taken at Rs.4,420 crore and why the international transaction be not adjusted on the basis of its deemed sale to Suzuki.

Maruti, in its reply dated 8th September, 2008, stated that at no point of time had there been any transfer of the ‘Maruti’ brand or logo by it to Suzuki, which did not have any right at all to use that logo or trade mark. It was submitted by Maruti that a registered trade mark could be transferred only by a written instrument of assignment, to be registered with the Registrar of Trade Marks, and no such instrument had been executed by it, at any point of time. It was also brought to the notice of the TPO that Maruti continued to use its brand and logo ‘Maruti’ on its products and even on the rear side of the models Esteem, ‘Maruti 800’ and ‘Omni’ , the ‘Maruti’ trade mark was being used along with the word ‘Suzuki.’ It was further submitted that Maruti continued to use the trade mark/logo ‘Maruti’ in all its advertisements, wrappers, letterheads, etc. It was also submitted by Maruti that Suzuki, on account of its large shareholding in the company and because of strong competition from the cars introduced by multinationals in India, had permitted them to use the ‘Suzuki’ name and logo, so that it could face the competition and sustain its market share, which was under severe attack. It was also submitted that Suzuki had not charged any additional consideration for use of their logo on the vehicles manufactured by Maruti and there was no question of any amount of revenue being transferred from the tax net of the Indian exchequer to any foreign tax jurisdiction. It was submitted that Maruti had, in fact, earned significantly larger revenue on account of the co-operation extended by Suzuki and that larger revenue was being offered to tax in India.
The jurisdiction of the TPO was thus disputed by ‘Maruti’ in the reply submitted to him. He was requested to withdraw the notice and drop the proceedings initiated by him.
Since Maruti did not get any response to the jurisdictional challenge and the TPO continued to hear the matter on the basis of the notice issued by him, without first giving a ruling on the jurisdiction issue raised by it, a writ petition was filed before the High Court seeking stay of the proceedings before the TPO. Vide interim order dated 19th September, 2008, the High Court directed that the proceedings pursuant to the show-cause notice may go on, but, in case any order is passed, that shall not be given effect to.

Since the TPO passed a final order on 30th October, 2008, during the pendency of the writ petition and also forwarded it to the Assessing Officer of the petitioner, the writ petition was amended so as to challenge the final order passed by the TPO.

In the final order passed by him, the TPO came to the conclusion that the trade mark ‘Suzuki’, which was owned by Suzuki Motor Corporation, had piggy-backed on the Maruti trade mark, without payment of any compensation by Suzuki to ‘Maruti’. He also came to the conclusion that the trade mark ‘Maruti’ had acquired the value of super brand, whereas the trade mark ‘Suzuki’ was a relatively weak brand in the Indian market and promotion of the co-branded trade mark ‘Maruti Suzuki’ had resulted in: “
(a) Use of ‘Suzuki’ — trade mark of the AE.
(b) Use of ‘Maruti’ — trade mark of the assessee.
(c) Reinforcement of ‘Suzuki’ trade mark which was a weak brand as compared to ‘Maruti’ in India.
(d) Impairment of the value of ‘Maruti’ trade mark due to branding process.”

The TPO noted that Maruti had paid royalty of Rs.198.6 crore to Suzuki in the year 2004-05, whereas no compensation had been paid to it by Suzuki, on account of its trade mark having piggy-backed on the trade mark of Maruti. Since Maruti did not give any bifurcation of the royalty paid to Suzuki towards licence for manufacture and use of trade mark, the TPO apportioned 50% of the royalty paid in the year 2004-05, to the use of the trade mark, on the basis of findings of piggy-backing of ‘Maruti’ trade mark, use of ‘Maruti’ trade mark on co-branded trade mark ‘Maruti Suzuki’, impairment of ‘Maruti’ trade mark and reinforcement of ‘Suzuki’ trade mark, through co-branding process. The arm’s-length price of royalty paid by Maruti to Suzuki was held as nil, using the CUP method. He also held, on the basis of the terms and conditions of the agreement between Maruti and Suzuki, that Maruti had developed marketing intangibles for Suzuki in India, at its costs, and it had not been compensated for developing those marketing intangibles for Suzuki. He also concluded that non-routine advertisement expenditure, amounting to Rs.107.22 crore, was also to be adjusted. He, thus, made a total adjustment of Rs.2,06,52,26,920 and also directed that the Assessing Officer of Maruti shall enhance its total income by that amount, for the A.Y. 2005-06.

The High Court set aside the order dated 30th October, 2008 of TPO and the TPO was directed to determine the appropriate arm’s-length price in respect of the international transactions entered into by the petitioner Maruti Suzuki India Limited with Suzuki Motor Corporation, Japan, in terms of the provisions contained in section 92C of the Income-tax Act and in the light of the observations made in the judgment and the view taken by it therein. The TPO was to determine the arm’s-length price within three months of the passing of this order [(2010) 328 ITR 210 (Del.)].

On an appeal by Maruti Suzuki India Ltd., the Supreme Court noted that the High Court had remitted the matter to the TPO with liberty to issue fresh show-cause notice. The High Court had further directed the TPO to decide the matter in accordance with the law. The Supreme Court observed that the High Court had not merely set aside the original show-cause notice but it had made certain observations on the merits of the case and had given directions to the Transfer Pricing Officer, which virtually concluded the matter. In the circumstances, on that limited issue, the Supreme Court directed the TPO, who, in the meantime, had already issued a show-cause notice on 16th September, 2010, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in its judgment dated 1st July, 2010.

The Supreme Court further directed that the Transfer Pricing Officer would decide this matter on or before 31st December, 2010.
    

Power to call for information – Powers u/s. 133(6) are in nature of survey and general enquiry to identify persons who are likely to have taxable income and whether they are in compliance with provisions of Act – The notice seeking information from a cooperative Bank in respect of its customers which had cash transactions on deposits of Rs. 1,00,000 and above for a period of three years without reference to any proceeding or enquiry pending before any authority under the Act was valid.

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Kathiroor Service Co-operative Bank Ltd. vs. CIT (CIB) & Ors. [2014] 360 ITR 243 (SC)

The appellant-assessee before the Supreme Court was a service co-operative rural bank. The Incometax Officer (CIB), Calicut, issued a notice on 2nd February, 2009 to the assessee u/s. 133(6) of the Act calling for general information regarding details of all persons (whether resident or non-resident) who have made (a) cash transactions (remittance, transfer, etc.) of Rs. 1,00,000 and above in any accounts and/or (b) time deposits (FDs, RDs, TDs, etc.) of Rs. 1,00,000 or above for the period of three years between 1st April, 2005 and 31st March, 2008. It was expressly stated therein that failure to furnish the aforesaid information would attract penal consequences. The assessee objected to the said notice on grounds, inter alia, that such notice seeking for information which is unrelated to any existing pending proceedings against the assessee could not be issued under the provisions of the Act and requested for withdrawal of the said notice.

The assessing authority addressed to the objections raised by the assessee and accordingly rejected them by letter dated 5th March, 2009. The assessing authority relied on the decision of the jurisdictional High Court in M.V. Rajendran vs. ITO [(2003) 260 ITR 442 (Ker) ] wherein it was held that the Department is free to ask for information about any particular person or to call for general information in regard to any matter they consider necessary. Section 133(6) does not refer to any enquiry about any particular person or assessee, but pertains to the information in relation to ‘such points or matters’ which the authority issuing notices needs. This clearly shows that information of a general nature can be called for and names and address of the depositors who hold deposits above a particular sum is certainly permissible. In fact, as the section presently stands, section 133(6) is a power of general survey and is not related to any person and no banking company including a nationalised bank is entitled to claim any immunity from furnishing such information.

The assessee, aggrieved by the aforesaid, filed Writ Petition before the High Court challenging the notice dated 2nd February, 2009. The learned single judge held that the impugned notice was validly issued under the provisions of the Act and, therefore, dismissed the said petition.

Thereafter, the assessee approached the Division Bench of the High Court by way of Writ Appeal questioning the said notice on grounds, inter alia, that the issuance of such notice u/s. 133(6) was bad in law as section 133(6) only provides for power to seek information in case of pending proceedings under the Act and does not contemplate the powers to seek fishing information which is unrelated to any existing proceedings or which may enable the assessing authority to decide upon institution of proceedings under the Act. The Division Bench has observed that the questions raised therein was no longer res integra in view of the decision of the Supreme Court in Karnataka Bank Ltd. vs. Secretary Government of India [2002] 9 SCC 106, and, accordingly dismissed the said appeal.

Aggrieved by the aforesaid, the assessee went before the Supreme Court in appeal.

The Supreme Court observed that before the introduction of amendment in section 133(6) in 1995, the Act only provided for issuance of notice in case of pending proceedings. As a Consequence of the said amendment, the scope of section 133(6) was expanded to include issuance of notice for the purposes of enquiry. The object of the amendment of section 133(6) by the Finance Act, 1995 (Act 22 of 1995), as explained by the Central Board of Direct Taxes in its circular showed that the legislative intention was to give wide powers to the officers, of course with the permission of the Commissioner of Income-tax or the Director of Investigation to gather particulars in the nature of survey and store those details in the computer so that the data so collected can be used for checking evasion of tax effectively.

The assessing authorities are now empowered to issue such notice calling for general information for the purposes of any enquiry in both cases: (a) where a proceeding is pending, and (b) where proceeding is not pending against the assessee. However, in the latter case, the assessing authority must obtain the prior approval of the Director or the Commissioner, as the case may be, before issuance of such notice. The word ‘enquiry’ would, thus, connote a request for information or questions to gather information either before the initiation of proceedings or during the pendency of proceedings; such information being useful for or relevant to the proceeding under the Act.

The Supreme Court referred to its decision in Karnataka Bank Ltd. vs. Secretary, Government of India [2002] 9 SCC 106, wherein it had examined the proposition whether a notice us/. 133(6) could be issued to seek information in cases where the proceedings are not pending and construed section 133(6) of the Act.

In that case, it was held that it was not necessary that any inquiry should have commenced with the issuance of notice or otherwise before section 133(6) could have been invoked. It is with the view to collect information that power is given u/s. 133(6) to issue notice, inter alia, requiring a banking company to furnish information in respect of such points or matters as may be useful or relevant. The second proviso makes it clear that such information can be sought for when no proceeding under the Act is pending.

In view of the aforesaid, the Supreme Court held that the powers u/s. 133(6) were in the nature of survey and a general enquiry to identify persons who are likely to have taxable income and whether they are in compliance with the provisions of the Act. It would not fall under the restricted domains of being ‘area specific’ or ‘case specific’. Section 133(6) does not refer to any enquiry about any particular person or assessee, but pertains to information in relation to “such points or matters” which the assessing authority issuing notices requires. This clearly illustrated that the information of general nature could be called for and requirement of furnishing names and addresses of depositors who hold deposits above a particular sum is certainly permissible.

In the instant case, by the impugned notice the assessing authority sought for information in respect of its customers which had cash transactions or deposits of Rs. 1,00,000 or above for a period of three years, without reference to any proceeding or enquiry pending before any authority under the Act. The notice was issued only after obtaining approval of the Commissioner of Income-tax, Cochin. The Supreme Court therefore held that the assessing authority has not erred in issuing the notice to the assessee-financial institution requiring it to furnish information regarding the account holders with cash transactions or deposits of more than Rs. 1,00,000.

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Search and Seizure – Section 132B(4)(b) as it stood dealt with pre-assessment period and there is no conflict between this provisions and section 240 or 244A which deals with post-assessment period after the appeal – Assessee is entitled to interest for the period from expiry of period of six months from the date of the order u/s. 132(5) to the date of the regular assessment order in respect of amounts seized and appropriated towards tax but which became refundable as a result of appellate orde<

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Chironjilal Sharma HUF vs. Union of India & Ors. [2014] 360 ITR 237 (SC)

In the search conducted in the house of the appellant on 31st January, 1990, a cash amount of Rs. 2,35,000 was recovered. On 31st May, 1990, an order u/s. 132(5) came to be passed. The Assessing Officer calculated the tax liability and cash seized from appellant’s house was appropriated. However, the order of the Assessing officer was finally set aside by the Tribunal on 20th February, 2004. The Revenue accepted the order of the Tribunal. Consequently, the appellant was refunded the amount of Rs. 2,35,000 along with interest from 4th March, 1994 (date of last of the regular assessments by the Assessing Officer) until the date of refund.

The Appellant (assessee) claimed that he was entitled to interest u/s. 132B(4)(b) of the Act which was holding the field at the relevant time for the period from expiry of period of six months from the date of order u/s. 132(5) to the date of regular assessment order. In other words, the order u/s. 132(5) of the Act having been passed on 31st May, 1990, six months expired on 30th November, 1990, and the last of the regular assessment was done on 4th March, 1994, the assessee claimed interest u/s. 132B(4)(b) of the Act from 1st December, 1990 to 4th March, 1994.

The Supreme Court observed that close look at the provisions of section 132(5) and 132B, and, particularly, clause (b) of u/s. 132B(4) of the Act showed that where the aggregate of the amounts retained u/s. 132 of the Act exceeded the amounts required to meet the liability u/s. 132B(1)(i), the Department is liable to pay simple interest at the rate of 15% on expiry of six months from the date of the order u/s. 132(5) of the Act to the date of the regular assessment or reassessment or the last of such assessments or reassessments, as the case may be. The Supreme Court noted that though in the regular assessment done by the Assessing Officer, the tax liability for the relevant period was found to be higher and, accordingly, the seized cash u/s. 132 of the Act was appropriated against the assessee’s tax liability but the order of the Assessing Officer was overturned by Tribunal finally on 20th February, 2004 and in fact, the interest for the post-assessment period, i.e., from 4th March, 1994, until refund on the excess amount was paid by the Department to the assessee. The Department denied the payment of interest to the assessee u/s. 132B(4)(b) on the ground that the refund of excess amount was governed by section 240 of the Act and section 132B(4)(b) had no application. According to the Supreme Court, however, section 132B(4)(b) dealt with pre-assessment period and there was no conflict between this provision and section 240 or for the matter section 244A. The former dealt with pre-assessment period in the matters of search and seizure and the latter deals with post-assessment period as per the order in appeal.

The Supreme Court held that the view of the Department was not right on the plain reading of section 132B(4)(b) of the Act as indicated above.

The Supreme Court, accordingly, allowed the appeal and set-aside the impugned order holding that the appellant was entitled to the simple interest at the rate of 15% p.a. u/s. 132B(4)(b) of the Act from 1st December, 1990 to 4th March, 1994.

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Penalty – Furnishing inaccurate particulars of income – Assessee inadvertently claiming a deduction though in tax audit report it was clearly stated that the amount debited to Profit & Loss Account was not allowable as deduction indicated that the assessee made a computation error in its return of income – Imposition of penalty was not justified.

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[Pricewaterhouse Coopers Pvt. Ltd. v CIT & Another (2012) 348 ITR 306 (SC)]

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.

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Reassessment — Assessee allowed to raise all contentions on merits in the reassessment proceedings

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The assessment for the A.Y. 2000-01 was re-opened after the expiry of four years from the end of the relevant assessment year for the reason that though in the tax audit report an amount of Rs.107.70 lakh had been shown u/s.41 of the Act, only Rs.9.23 lakh on account of provision for warranties no longer required was written back under the head ‘Other sources of Income’ leaving a balance of Rs.98.46 lakh resulting in escapement of income. The other reason for reopening was that though dividend income of Rs.188.73 lakh was earned which was exempt u/s.10(33), no disallowance was made of the expenses related to purchase/sale of the investment.

In fact the balance amount of Rs.98.46 lakh was added back under different heads, but was not separately indicated and in its objection the assessee did not take this specific plea. It only stated that Rs.1,07,69,936 was added back/credited to the profit and loss account and one item of Rs.9,23,471 was reflected on the credit side of the profit and loss account. As regards, disallowance of expenses incurred for earning tax-free income it was contended that section 14A was introduced in the statute by the Finance Act, 2001, with retrospective effect from April 1, 1962 and the return was filed on 30-11-2000 and therefore it was not obligatory to make a disallowance and there was no failure on the part of the assessee in disclosing fully and truly the material facts in respect of the expenditure incurred for earning the tax-free income. The assessee also relied upon the proviso to section 14A which prohibited reopening of assessment for any assessment year beginning on or before 1-4-2001.

On a writ challenging the notice issued u/s.148 for want of jurisdiction, the Delhi High Court noted that in reply to the notice issued u/s.154 of the Act the assessee had given the full break-up and specific details with regard to credit/adjustment of Rs.98.46 lakh into profit and loss account and hence it found some merit in the contention of the assessee. However, it did not dwell further on this aspect since the notice was sustainable on the ground of section 14A. According to the High Court the proviso to section 14A only barred the reassessment/rectification and not the original assessment on the basis of retrospective amendment. Since the Assessing Officer had failed to apply section 14A when he passed the original assessment order, it had prima facie resulted in escapement of income. According to the High Court there was an omission and failure on the part of the assessee to point out the expenses incurred relatable to tax-free/exempt income which prima facie have been claimed as a deduction in the income and expenditure account and hence there was omission and failure on the part of the petition to disclose fully and truly the material facts.

On an appeal, the Supreme Court held that in its view the reopening of the assessment was fully justified on the facts and circumstances of the case. However, on merits of the case, it would be open to the assessee to raise all contention with regard to the amount of Rs.98.46 lakh being offered for tax as well as its contention on section 14A of the Act.

[Honda Siel Power Products Ltd. v. Dy. CIT and Others, (2012) 340 ITR 53 (SC)]

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Appeal to Supreme Court – Special Leave Petition – Delay by the Government bodies – Unless there is a reasonable and acceptable explanation for the delay and there is bona fide effort, the usual explanation regarding procedural delay should not be accepted.

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[Office of the Chief Post Master General and Others v. Living Media India Ltd. and Anr. (2012) 348 ITR 7 (SC)]

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.

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Business Expenditure – Where payment is for acquisition of know-how to be used in the business of the assessee, deduction is to be allowed u/s. 35AB and section 37 has no application.

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[Drilcos (India) Pvt. Ltd. v. CIT (2012) 348 ITR 382 (SC)]

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.

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Valuation of stock – In valuing the closing stock the element of excise duty is not to be included.

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[CIT v. Dynavision Ltd. (2012) 348 ITR 380 (SC)]

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.

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Doctrine of merger — If for any reason an appeal is dismissed on the grounds of limitation and not on merits, that order would not merge with the orders passed by the Appellate Authority.

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[Raja Mechanical Co. (P) Ltd. v. CCE, (2012) 345 ITR 356 (SC)]

The Supreme Court noted that the facts were not in dispute and could not be disputed that there was a delay in filing the prescribed forms before the assessing authority. Therefore, the assessing authority had rejected the claim of the assessee and accordingly, had directed him for payment of the excise duty credit availed of by the assessee. Aggrieved by that order, the assessee had belatedly filed an appeal before the proper Appellate Authority. Since there was delay in filing the appeal and since the same was not within the time that the Appellate Authority dismissed the same. It is that order which was questioned before the Tribunal. Before the Tribunal, the assessee had requested the Tribunal to first condone the delay and next to decide the appeal on the merits, i.e., to decide whether the adjudicating authority was justified in disallowing the benefit of the MODVAT credit that was availed of by the assessee. The Tribunal had not conceded to the second request Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings made by the assessee and only accepted the findings and conclusions reached by the Commissioner of Appeals, who had rejected the appeal.

The question that fell for the consideration and decision of the Supreme Court was whether the Tribunal was justified in not considering the case of the assessee on merits. The assessee’s stand before the Tribunal and before the Supreme Court was that the orders passed by the adjudicating authority would merge with the orders passed by the first Appellate Authority and the Tribunal ought to have considered the appeal filed by the assessee on merits also. According to the Supreme Court such a stand of the assessee could not be accepted in view of the plethora of decisions of the Supreme Court, wherein it has been categorically observed that if for any reason an appeal is dismissed on the ground of limitation and not on merits, that order would not merge with the orders passed by the first Appellate Authority. In that view of the matter, the Supreme Court was of the opinion that the High Court was justified in rejecting the request made by the assessee for directing the Revenue to state the case and also the question of law for its consideration and decision. According to the Supreme Court there was no merit in the appeal.

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Charitable Purpose – Application of income – Amounts transferred by the Mandi Samiti to the Mandi Parishad in accordance with the Adhiniyam constitutes application of income for charitable purposes.

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[CIT v. Krishi Utpadan Mandi Samiti (2012) 348 ITR 566 (SC)]

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.

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Deduction of tax at sources – The Transaction of purchase of stamp papers at discount by the Stamp Vendors from the State Government is a transaction of sale and there is no obligation on the State Government to deduct tax at source u/s. 194 H on the amount of discount.

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[CIT v Ahmedabad Stamp Vendors Association (2012) 348 ITR 378 (SC)]

The registered association of the stamp vendors of Ahmedabad approached the Gujarat High Court to quash the communication received from the Income Tax Department calling upon the State Government to deduct tax at source u/s. 194 H on commission or brokerage to the person carrying the business as “Stamp Vendors” and for a declaration that section 194H was not applicable to an assessee carrying on business as a stamp vendor.

The principal controversy before the High Court was whether the stamp vendors were agents of the State Government who were being paid commission or brokerage or whether the sale of stamp papers by the Government to the licensed vendors was on principal to principal basis involving the contract of sale.

The High Court after considering the Gujarat Stamps and Sales Rules, 1987, Gujarat Sales Tax Act, 1969 and the authorities cited held that the stamp vendors were required to purchase the stamp papers on payment of price less the discount on the principal to principal basis and there was no contract of agency at any point of time and that the discount made available to the licensed stamp vendors under the provisions of the Gujarat Stamps and Supply and Sales Rules, 1987, does not fall within the expression ‘commission’ or ‘brokerage’ u/s. 194H of the Act.

On appeal by the Department, the Supreme Court held that 0.50 % to 4 % discount given to the stamp vendors was for purchasing the stamps in bulk quantity and the said discount was in the nature of the cash discount. The Supreme Court concurred with the judgement of the High Court that the impugned transaction was a sale and consequently, section 194H had no application.

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Penalty – Concealment of Income – There is no time limit prescribed for payment of tax with interest for the grant of immunity under clause (2) of Explanation 5 to section 271(1)(c).

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[Asst. CIT v. Gebilal Kanhaialal HUF (2012) 348 ITR 561 (SC)]

Search and seizure operation were carried out during the period 29-7-1987 to 1-8-1987 at the residential/business premises of the assessee HUF, represented by the Karta, Shri Kalyanmal Karva. Assets worth Rs.48,32,000 besides incriminating documents were seized. On 1-8-1987, the Karta while surrendering the amount made a statement u/s. 132(4). The return of income for the assessment year 1987-88 which was required to be filed u/s.139(1) on or before 31-7-1987 was not filed. Pursuant to notices issued u/s.142(1)(ii) in December 1988, the assessee on 16-2-1990 furnished required information including statement of all assets and liabilities whether included in the accounts or not. In the said statement, the said Karta reiterated his earlier statement of concealment. The Department denied the immunity under clause (2) of Explanation 5 to section 271(1) (c) mainly for the reason that the assessee had failed to file his return of income on or before 31-7-1987 and had failed to pay the tax thereon.

The Supreme Court observed that Explanation 5 is a deeming provision. It provides that where, in the course of search u/s. 132, that assessee is found to be the owner of unaccounted assets and the assessee claims that such assets have been acquired by him by utilising, wholly or partly, his income for any previous year which has ended before the date of search or which is to end on or after the date of search, then, in such a situation, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall be deemed to have concealed the particulars of his income for the purposes of imposition of penalty u/s. 271(1)(c). The only exception to such a deeming provision or to such a presumption of concealment is given in sub-clause (1) and (2) of Explanation 5. Three conditions have got to be satisfied by the assessee for claiming immunity from payment of penalty under clause (2) of Explanation 5 of section 271(1)(c). The first condition was that the assessee must make a statement u/s. 132(4) in the course of search, stating that the unaccounted assets and incriminating documents found from his possession during the search have been acquired out of his income, which has not been disclosed in the return of income to be furnished before expiry of time specified in section 139(1). Such statement was made by the karta during the search which concluded on 1st August, 1987. It was not in dispute that condition No.1 was fulfilled. The second conditions for availing of the immunity from penalty u/s. 271(1)(c) was that the assessee should specify, in his statement u/s. 132(4), the manner in which such income stood derived. Admittedly, the second condition, in the present case also stood satisfied. According to the Department, the assessee was not entitled to immunity under clause (2) as he did not satisfy the third condition for availing of the benefit of waiver of penalty u/s. 271(1)(c) as the assessee failed to file his return of income on 31st July, 1987, and pay tax thereon particularly when the assessee conceded on 1st August, 1987 that there was concealment of income.

The Supreme Court held that the third condition under clause (2) was that the assessee had to pay the tax together with interest, if any, in respect of such undisclosed income. However, no time limit for payment of such tax stood prescribed under clause (2). The only requirement stipulated in the third condition was for the assessee to “pay tax together with interest”. In the present case, according to the Supreme Court, the third condition also stood fulfilled. The assessee had paid tax with interest up to the date of payment.

The Supreme Court held that the assessee was entitled to immunity under clause (2) of Explanation 5 to section 271(1)(c).

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Business expenditure — Banks — The provisions of clause (viia) of section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) are distinct and independent of the provisions of section 36(1) (vii) relating to allowance of the bad debts — The scheduled commercial banks would continue to get the full benefit of the writeoff of the irrecoverable debt(s) u/s.36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) u/s<

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[Catholic Syrian Bank Ltd. v. CIT, (2012) 343 ITR 270 (SC)]

The
assessee, a scheduled bank, filed its return of income for the A.Y.
2002-03 on October 24, 2002, declaring total income of Rs.61,15,610. The
return was processed u/s.143(1), and eligible refund was issued in
favour of the assessee. However, the Assessing Officer issued notice
u/s.143(2) to the assessee, after which the assessment was completed.
Inter alia, the Assessing Officer, while dealing, u/s.143(3), with the
claim of the assessee for bad debts of Rs.12,65,95,770, noticed that the
argument put forward on behalf of the assessee, that the deduction
allowable u/s.36(1) (vii) is independent of deduction u/s.36(1)(viia),
could not be accepted. Consequently, he observed that the assessee
having a provision of Rs.15,01,29,990 for bad and doubtful debts
u/s.36(1)(viia), could not claim the amount of Rs.12,65,95,770 as
deduction on account of bad debts because the bad debts did not exceed
the credit balance in the provision for bad and doubtful debts account
and also the requirements of clause (v) of s.s (2) of section 36 were
not satisfied. Therefore, the assessee’s claim for deduction of bad
debts written off from the account books was disallowed. This amount was
added back to the taxable income of the assessee, for which a demand
notice and challan was accordingly issued. This order of the Assessing
Officer dated January 24, 2005, was challenged in appeal by the assessee
on various grounds.

The Commissioner of Income-tax (Appeals)
vide his order dated April 7, 2006, partly allowed the appeal,
particularly in relation to the claim of the appellantbank for bad
debts. Relying upon the judgment of a Division Bench of the Kerala High
Court in the case of South Indian Bank Ltd. v. CIT, (2003) 262 ITR 579
(Ker.), the Commissioner of Income-tax (Appeals) held that the claim of
the appellant was fully supported by the said decision and since the
entire bad debts written off by the bank u/s.36(1)(vii) were pertaining
to urban branches only and not to the provision made for rural brances
u/s.36(1)(viia), it was entitled to the deduction of the full claimed
amount of Rs.12,65,95,770. Consequently, he directed deletion of the
said amount.

Being aggrieved from the order of the Commissioner
of Income-tax (Appeals), the Revenue as well as the assessee filed
appeal before the Income Tax Appellate Tribunal, Cochin. Vide its order
dated April 16, 2007, while relying upon the judgment of the
jurisdictional High Court in the case of South Indian Bank Ltd. (supra),
the Income Tax Appellate Tribunal dismissed the appeal of the Revenue
on this issue and also granted certain other benefits to the assessee in
relation to other items.

However, the Department of Income-tax,
being dissatisfied with the order of the Income Tax Appellate Tribunal
in the A.Y. 2002-03, filed an appeal before the High Court u/s.260A of
the Act.

The Division Bench of the High Court of Kerala at
Ernakulam hearing the batch of appeals against the order of the Income
Tax Appellate Tribunal expressed the view that the judgment of that
Court in the case of South Indian Bank (supra) was not a correct
exposition of law. While dissenting therefrom, the Bench directed the
matter to be placed before a Full Bench of the High Court.

Vide
its judgment dated December 16, 2009, the Full Bench not only answered
the question of law but even decided the case on the merits. While
setting aside the view taken by the Division Bench in South Indian Bank
(supra) and also the concurrent view taken by the Commissioner of
Income-tax (Appeals) and the Income Tax Appellate Tribunal, the Full
Bench of the High Court held as under (page 181 of 326 ITR):

“What
is clear from the above is that provision for bad and doubtful debts
normally is not an allowable deduction and what is allowable under the
main clause is bad debt actually written off. However, so far as banks
to which clause (viia) applies are concerned, they are entitled to claim
deduction of provision u/ss.(viia), but at the same time when bad debts
written off is also claimed deduction under clause (vii), the same will
be allowed as a deduction only to the extent it is in excess of the
provision created and allowed as a deduction under clause (viia). It is
worthwhile to note that deduction u/s.36(1)(vii) is subject to s.s (2)
of section 36 which in clause (v) specifically states that any bad debt
written off should be claimed as a deduction only after debiting it to
the provision created for bad and doubtful debts. What is clear from the
above provisions is that though the respondent-banks are entitled to
claim deduction of provision for bad and doubtful debts in terms of
clause (viia), such banks are entitled to deduction of bad debt actually
written off only to the extent it is in excess of the provision created
and allowed as deduction under clause (viia). Further, in order to
qualify for deduction of bad debt written off the requirement of section
36(2)(v) is that such amount should be debited to the provision created
under clause (viia) of section 36(1). Therefore, we are of the view
that the distinction drawn by the Division Bench in the South Indian
Bank’s case between the bad debts written off in respect of advances
made by rural branches and bad debts pertaining to advances made by
other branches does not exist and is not visualised under the proviso to
section 36(1)(vii). We, therefore, hold that the said decision of this
Court does not lay down the correct interpretation of the provisions of
the Act. Admittedly, all the respondent-assessees have claimed and have
been allowed deduction of provision in terms of clause (viia) of the
Act. Therefore, when they claim deduction of bad debt written off in the
previous year by virtue of the proviso to section 36(1)(vii), they are
entitled to claim deduction of such bad debt only to the extent it
exceeds the provision created and allowed as deduction under clause
(viia) of the Act.

In the normal course we should answer the
question referred to us by the Division Bench and send back the appeals
to the Division Bench to decide the appeals consistent with the Full
Bench Decision. However, since this is the only issue that arises in the
appeals, we feel it would be only an empty formality to send back the
matter to the Division Bench for disposal of appeals consistent with our
judgment. In order to avoid unnecessary posting of appeals before the
Division Bench, we allow the appeals by setting aside the orders of the
Tribunal and by restoring the assessments confirmed in first appeals.”

Dissatisfied
from the judgment of the Full Bench of the Kerala High Court, the
assessee filed the appeals before the Supreme Court purely on question
of law.

The Supreme Court held that the income of an assessee
carrying on a business or profession has to be assessed in accordance
with the scheme contained in Part D of Chapter IV dealing with heads of
income. Section 28 of the Act deals with the chargeability of income to
tax under the head ‘Profits and gains of business or profession’. All
‘other deductions’ available to an assessee under this head of income
are dealt with u/s.36 of the Act which opens with the words ‘the
deduction provided for in the following clauses shall be allowed in
respect of matters dealt with therein, in computing the income referred
to in section 28’. In other words, for the purposes of computing the
income chargeable to tax, beside specific deductions, ‘other deductions’
postulated in different clauses of section 36 are to be allowed by the
Assessing Officer, in accordance with law.

Section 36(1)(vii) and 36(1)(viia) provide for such deductions, which are to be permitted, in accordance with the language of these provisions. A bare reading of these provisions shows that sections 36(1) and 36(1)(viia) are separate items of deduction. These are independent provisions and, therefore, cannot be intermingled or read into each other. It is a settled canon of interpretation of fiscal statutes that they need to be construed strictly and on their plain reading.

The provision of section 36(1)(vii) would come into play in the grant of deductions, subject to the limitation contained in section 36(2) of the Act. Any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year is the deduction which the assessee would be entitled to get, provided he satisfies the requirements of section 36(2) of the Act. Allowing of deduction of bad debts is controlled by the provisions of section 36(2). The argument advanced on behalf of the Revenue is that it would amount to allowing a double deduction if the provisions of section 36(1)(vii) and 36(1)(viia) are permitted to operate independently. There is no doubt that a statute is normally not construed to provide for a double benefit unless it is specifically so stipulated or is clear from the scheme of the Act. As far as the question of double benefit is concerned, the Legislature in its wisdom introduced section 36(2)(v) by the Finance Act, 1985, with effect from April 1, 1985. Section 36(2)(v) concerns itself as a check for claim of any double deduction and has to be read in conjunction with section 36(1)(viia) of the Act. It requires the assessee to debit the amount of such debt or part thereof in the previous year to the provision made for that purpose.

The Supreme Court, referring to the Circular Nos. 258, dated 14-6-1979, 421, dated 12-6-1988, 464, dated 18-7-1986 and the objects and reasons for the Finance Act, 1986, held that clear legislative intent of the relevant provisions and unambiguous language of the Circulars with reference to the amendments to section 36 of the Act demonstrate that the deduction on account of provision for bad and doubtful debts u/s.36(1)(viia) is distinct and independent of the provisions of section 36(1)(vii) relating to allowance of the bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. Another material aspect of the functioning of such banks is that their rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of accounts of the principal or head office branch. According to the Supreme Court the Circulars in question show a trend of encouraging rural business and for providing greater deductions. The purpose of granting such deductions would stand frustrated if these deductions are implicitly neutralised against other independent deductions specifically provided under the provisions of the Act.

The Supreme Court further held that the language of section 36(1)(vii) of the Act is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the amounts of the assessee for the previous year. This benefit is subject only to section 36(2) of the Act. It is obligatory upon the assessee to prove to the Assessing Officer that the case satisfies the ingredients of section 36(1)(vii) on the one hand and that it satisfies the requirements stated in section 36(2) of the Act on the other. The proviso to section 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely u/s.36(1)(viia) of the Act. The Supreme Court noticed that the Explanation to section 36(1)(vii), introduced by the Finance Act, 2001, had to be examined in conjunction with the principal section. The Explanation specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of ‘any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee’. Thus, the concept of making a provision for bad and doubtful debts would fall outside the scope of section 36(1)(vii) simpliciter. The proviso, would have to be read with the provisions of section 36(1)(viia) of the Act. Once the bad debt is actually written off as irrecoverable and the requirements of section 36(2) satisfied, then, it would not be permissible to deny such deduction on the apprehension of double deduction under the provisions of section 36(1)(viia) and the proviso to section 36(1)(vii). According to the Supreme Court this did not appear to be the intention of the framers of law. The scheduled and non-scheduled commercial banks would continue to get the full benefit of write-off of the irrecoverable debts u/s.36(1)(vii) in addition to the benefit of deduction of bad and doubtful debts u/s.36(1)(viia). Mere provision for bad and doubtful debts may not be allowable, but in the case of a rural advance, the same, in terms of section 36(1)(viia)(a), may be allowable without insisting on an actual write-off.

The Supreme Court observed that as per the proviso to clause (vii), the deduction on account of the actual write-off of bad debts would be limited to the excess of the amount written off over the amount of the provision which had already been allowed under clause (viia). According to the Supreme Court the proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by clause (viia), there would be no double deduction. The proviso, in its terms, limits its application to the case of a bank to which clause (viia)applies. Indisputably, clause (viia)(a) applies only to rural advances.

The Supreme Court further observed that as far as foreign banks are concerned, u/s.36(1)(viia)(b) and as far as public finance institutions or State financial corporations or State industrial investment corporations are concerned, u/s.36(1)(viia)(c), they do not have rural branches. The Supreme Court therefore inferred that the proviso is self-indicative that its application is to bad debts arising out of rural advances.

In a concurring judgment, the Chief Justice held that u/s.36(1)(vii) of the Income-tax Act, 1961, the taxpayer carrying on business is entitled to a deduction, in the computation of taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act inserted clause (viia) in relation to their rural advances, the Finance Act inserted clause (viia) in s.s (1) of section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debt(s) relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the Income-tax Rules, 1962. Thus, the provisions of clause (viia) of section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of section 36(1)(vii) relating to allowance of the bad debts. In other wards, the scheduled commercial banks would continue to get the full benefit of the write-off of the irrecoverable debt(s) u/s.36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) u/s.36(1)(viia). A reading of the Circulars issued by Central Board of Direct Taxes indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write-off. However, this may result in double allowance in the sense that in respect of the same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of accrual write-off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write-off to the excess, if any, of the write-off over the amount standing to the credit of the account created under clause (viia).

Note: The Court incidentally considered whether, when findings recorded in the other assessment year are accepted by the Revenue, it should be permitted to question the correctness of the same in the subsequent years. The relevant portion of the judgment is extracted below:

The applicant has contended that as the similar claims had been decided in favour of the banks for the A.Ys. 1991-92 to 1993-94 by the Special Bench of the Income Tax Appellate Tribunal, which had not been challenged by the Department, as such, the issue had attained finality and could not be disturbed in the subsequent years.

The above contention of the appellant-banks does not impress us at all. Merely because the orders of the Special Bench of the Income Tax Appellate Tribunal were not assailed in appeal by the Department itself, this would not take away the right of the Revenue to question the correctness of the orders of assessment, particularly when a question of law is involved. There is no doubt that the earlier orders of the Commissioner of Income-tax (Appeals) had merged into the judgment of the Special Bench of the Income Tax Appellate Tribunal and attained finality for that relevant year. Equally, it is true that though the Full Bench judgment of that very Court in the case of South Indian Bank (supra), it did not notice any of the contentions before and principles stated by the Special Bench of the Income Tax Appellate Tribunal in its impugned judgment. As already noticed, the questions raised in the present appeal go to the very root of the matter and are questions of law in relation to interpretation of sections 36(1)(vii) and 36(1)(viia) read with section 36(2) of the Act. Thus, without any hesitation, we reject the contention of the appellant-banks that the findings recorded in the earlier A.Ys. 1991-92 to 1993-94 would be binding on the Department for subsequent years as well.

Double Taxation Avoidance Agreement — While India is not a party to the Vienna Convention, it contains many principles of customary international law, and the principle of interpretation of Article 31 of the Vienna Convention, provides a broad guide-line as to what could be an appropriate manner of interpreting a treaty in Indian context also.

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In a petition filed before the Supreme Court by an organisation called Citizen India based upon media and scholarly reports alleged that various individuals, mostly citizens, but may also include non-citizens, and other entities with presence in India, have generated and secreted away large sums of monies, through their activities in India or relating to India, in various foreign banks, especially in tax havens and jurisdiction that have strong secrecy laws with respect to the contents of bank accounts and the identities of individuals holding such accounts and that the Government of India and its agencies have been very lax in terms of keeping an eye on the various unlawful activities generating unaccounted monies; the consequent tax evasion and such laxity extends to efforts to curtail the flow of such funds out and into, India and seeking the Court’s intervention to order proper investigations and monitor continuously, the action of the Union of India, and any and all governmental departments and agencies in these matters.

In deciding the matter, the Supreme Court had an occasion to consider the Double Taxation Avoidance Agreement with Germany and the Vienna Connection and it made certain observations with respect to the same.

The Supreme Court noted the relevant portions of Article 26 of the Double Taxation Avoidance Agreement with Germany, which reads as follows:

“1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Agreement. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of or the determination of appeals in relation to, the taxes covered by this Agreement. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

2. In no case shall the provisions of paragraph 1 be construed so as to impose on Contracting State the obligation:

(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process or information, the disclosure of which would be contrary to public policy (order public).”

The Supreme Court observed that the above clause in the relevant agreement with Germany would indicate that there is no absolute bar or secrecy. Instead the agreement specifically provides that the information may be disclosed in public court proceedings which the instant proceedings are. The proceedings before it, relate both to the issue of tax collection with respect to unaccounted monies deposited into foreign bank accounts, as well as with issues relating to the manner in which such monies were generated, which may include activities that are criminal in nature also. Comity of nations cannot be predicated upon clauses of secrecy that could hinder constitutional proceedings such as these, or criminal proceedings.

The Supreme Court noted that the claim of the Union of India is that the phrase ‘public court proceedings’, in the last sentence in Article 26(1) of the Double Taxation Avoidance Agreement only relates to proceedings relating to tax matters. The Union of India claims that such an understanding comports with how it is understood internationally. In this regard, the Union of India cited a few treatises. According to the Supreme Court, however, the Union of India did not provide any evidence that Germany specifically requested it to not reveal the details with respect to accounts in the Liechtenstein even in the context of proceedings before it.

The Supreme Court held that in Article 31, ‘General Rule of Interpretation’, of the Vienna Convention of the Law of Treaties, 1969, provides that a “treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” While India is not a party to the Vienna Convention, it contains many principles of customary international law, and the principle of interpretation of Article 31 of the Vienna Convention, provides a broad guideline as to what could be an appropriate manner of interpreting a treaty in Indian context also.

The Supreme Court said that in Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706; (2004) 10 SCC 1, it approvingly had noted Frank Bennion’s observations that a treaty is really an indirect enactment instead of a substantive legislation, and that drafting of treaties is notoriously sloppy, whereby inconveniences obtain. In this regard this Court further noted that the dictum of Lord Widgery C.J. that the words “are to be given their general meaning, general to lawyer and layman alike . . . . The meaning of the diplomat rather than the lawyer.” The broad principle of interpretation, with respect to treaties, and the provisions therein, would be that the ordinary meanings of words be given effect to, unless the context requires or otherwise. However, the fact that such treaties are drafted by diplomats, and not lawyers, leading to sloppiness in drafting also implies that care has to be taken to not render any word, phrase, or sentence redundant, especially where rendering of such word, phrase or sentence redundant would lead to a manifestly absurd situation, particularly from a constitutional perspective. The Government cannot bind India in a manner that derogates from constitutional provisions, values and imperatives.

The last sentence of the Article 26(1) of the Double Taxation Avoidance Agreement with Germany, “They may disclose this information in public court proceedings or in judicial decisions,” is revelatory in this regard. It stands out as an additional aspect or provision, and an exception, to the proceeding portion of the said Article. It is located after the specification that information shared between the Contracting Parties may be revealed only to “persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to taxes covered by this Agreement.” Consequently, it has to be understood that the phrase ‘public court proceedings’ specified in the last sentence in Article 26(1) of the Double Taxation Avoidance Agreement with Germany refers to court proceedings other than those in connection with tax assessment, enforcement, prosecution, etc., with respect to tax matters. If it were otherwise, as argued by the Union of India, then there would have been no need to have that last sentence in Article 26(1) of the Double Taxation Avoidance Agreement at all. The last sentence would become redundant if the interpretation pressed by the Union of India is accepted. Thus, notwithstanding the alleged convention of interpreting the last sentence only as referring to proceedings in tax matters, the rubric of common law jurisprudence, and fealty to its principles, leads us inexorably to the conclusion that the language in this specific treaty, and under these circumstances cannot be interpreted in the manner sought by the Union of India.

The Supreme Court while agreeing that the language could have been tighter, and may be deemed to be sloppy, to use Frank Bennion’s characterisation, negotiation of such treaties are conducted and secured at very high levels of Government, with awareness of general principles of interpretation used in various jurisdictions. It is fairly well known, at least in common law jurisdictions, that legal instruments and statutes are interpreted in a manner whereby redundancy of expressions and phrases is sought to be avoided.

The Supreme Court inter alia constituted Special Investigation Team to take over the matter of investigation of the individuals whose names had been disclosed by Germany as having accounts in Liechtenstein; and expeditiously conduct the same.

Industrial undertaking – Deduction under section 80IA – In the absence of separate books of accounts in respect of manufacturing activity and trading activity, the Assessing Officer was justified in working out the manufacturing account.

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[Arisudana Spinning Mills Ltd. v. CIT (2012) 348 ITR 385 (SC)]

The assessee, engaged in manufacturing yarn, filed its return of income for the assessment year 1998-99 on 30-11-1998 showing total income of Rs.36,27,866 inter alia after claiming deduction u/s. 80IA of Rs.15,54,800 being 30% of the gross total income of Rs.51,82,666. The Assessing Officer found that the assessee had sold raw wool, wool waste and textile and knitting clothes and that the assessee had not maintained a separate trading and Profit and Loss account for the goods manufactured. The assessee contended that for certain business exigencies in the assessment year in question, it had sold the above items but such sale would not disentitle him from claiming the benefit u/s. 80IA on the told sum of Rs.51,82,666. The Assessing Officer, in the absence of separate accounts for manufacture of yarn actually produced as a part of the industrial undertaking, worked out on his own, the manufacturing account giving bifurcation in terms of quantity of wool produced. The assessee challenged the preparation of separate trading account by the Assessing Officer in respect of manufacturing and trading activity before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) allowed the appeal. The Tribunal reversed the order of the Commissioner of Income Tax (Appeals). The High Court upheld the order of the Tribunal.

On further appeal, the Supreme Court was of the view that the finding given by the Tribunal and the High Court were findings of fact. The Supreme Court dismissed the appeal, observing that the assessee ought to have maintained a separate account in respect of raw material which it had sold during the assessment year, so that a clear picture would have emerged indicating the income occurring from manufacturing activity and the income occurring on sale of raw materials.

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Capital or revenue receipt — Non-competition fee is a capital receipt — Not exigible to tax prior to amendment of Finance Act, 2002.

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[Gufic Chem P. Ltd. v. CIT, (2011) 332 ITR 602 (SC)]

During the A.Y. 1997-98 the assessee received Rs.50,00,000 from Ranbaxy as non-competition fee. The said amount was paid by Ranbaxy under an agreement dated 31st March, 1997. The assessee was a part of the Guffic group. The assessee had agreed to transfer its trade marks to Ranbaxy and in consideration of such transfer the assessee agreed that it shall not carry on directly or indirectly the business hitherto carried on by it on the terms and conditions appearing in the agreement. The assessee was carrying on the business of manufacturing, selling and distribution of pharmaceutical and medical preparations including products mentioned in the list in schedule A to the agreement. The agreement defined the period, i.e., a period of 20 years commencing from the date of the agreement. The agreement defined the territory as territory of India and rest of the world. In short, the agreement contained prohibitory/ restrictive covenant in consideration of which a non-competition fee of Rs.50 lakh was received by the assessee from Ranbaxy. The agreement further showed that the payment made to the assessee was in consideration of the restrictive covenant undertaken by the assessee for a loss of source of income.

On perusal of the said agreement, the Commissioner of Income-tax (Appeals) while overruling the decision of the Assessing Officer observed that the Assessing Officer had not disputed the fact that Rs.50 lakh received by the assessee from Ranbaxy was towards non-competition fee; that under the said agreement the assessee agreed not to manufacture, itself or through its associate, any of the products enlisted in the schedule to the agreement for 20 years within India and the rest of the world; that the assessee and Ranbaxy were both engaged in the business of pharmaceuticals and to ward off competition in manufacture of certain drugs, Ranbaxy had entered into an agreement with the assessee restricting the assessee from manufacturing the drugs mentioned in the schedule and consequently the Commissioner of Income-tax (Appeals) held that the said sum of Rs.50 lakh received by the assessee from Ranbaxy was a capital receipt not taxable under the Income-tax Act, 1961 during the relevant assessment year. This decision was affirmed by the Tribunal. However, the High Court reversed the decision of the Tribunal by placing reliance on the judgment of the Supreme Court in the case of Gillanders Arbuthnot and Co. Ltd. v. CIT, (1964) 53 ITR 283. Against the said decision of the High Court the assessee went to the Supreme Court by way of petition for special leave to appeal.

The Supreme Court held that the position in law was clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt, whereas the compensation attributable to a negative covenant is a capital receipt. The above dichotomy is clearly spelt out in the judgment of this Court in Gillanders’ case (supra).

The Supreme Court observed that this dichotomy had not been appreciated by the High Court in its impugned judgment. The High Court misinterpreted the judgment of this Court in Gillanders’ case (supra). In the present case, the Department had not impugned the genuineness of the transaction. In the present case, the High Court had erred in interfering with the concurrent finding of the fact recorded by the Commissioner of Incometax (Appeals) and the Tribunal. According to the Supreme Court one more aspect needed to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt prior to the A.Y. 2003-04. It is only vide the Finance Act, 2002 with effect from 1st April, 2003 that the said capital receipt was made taxable [see section 28(va)]. The Finance Act, 2002 itself indicated that during the relevant assessment year compensation received by the assessee under non-compensation agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1st April, 2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under the non-compensation agreement was in the nature of a capital receipt and not a revenue receipt. The said section 28(va) was amendatory and not clarificatory.

For the above reasons, the Supreme Court set aside the impugned judgment of the Karnataka High Court dated 29th October, 2009, and restored the order of the Tribunal. Consequently, the civil appeal filed by the assessee was allowed with no order as to the costs.

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