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Category: Glimpses Of Supreme Court Rulings

Authority of Advance Ruling – Advance Ruling of the Authority could be challenged before the appropriate High Court under Article 226 and/or 227 of the Constitution of India and is to be heard by the Division Bench hearing income tax matters expeditiously.

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[Columbia Sportswear Co. v. DIT, Bangalore (2012) 346 ITR 161 (SC)]

The Petitioner, a company incorporated in the United States of America (for short ‘the USA’) was engaged in the business of designing, developing, marketing and distributing outdoor apparel. For making purchases for its business, the petitioner established a liaison office in Chennai with the permission of the Reserve Bank of India (for short “the RBI”) in 1995. The RBI granted the permission in its letter dated 01.03.1995 subject to the conditions stipulated therein. The permission letter dated 01.03.1995 of the RBI stated that the liaison office of the petitioner was for the purpose of undertaking purely liaison activities viz. to inspect the quality, to ensure shipments and to act as a communication channel between head office and parties in India and except such liaison work, the liaison office will not undertake any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name without the prior permission of the RBI. The petitioner also obtained permission on 19.06.2000 from the RBI for opening an additional liaison office in Bangalore on the same terms and conditions as mentioned in the letter dated 01.03.1995 of the RBI.

On 10.12.2009, the petitioner filed an application before the Authority for Advance Rulings (for short ‘the Authority’) on the questions relating to its transactions in its liaison office in India.

The Authority heard the petitioner and the respondent and passed the order dated 08.08.2011. In para 34 of the said order, the Authority gave its ruling on the six questions raised before it as follows:

(1) A portion of the income of the business of designing, manufacturing and sale of the products imported by the applicant from India accrued to the applicant in India.

(2) The applicant had a business connection in India being its liaison office located in India.

(3) The activities of the Liaison Office in India were not confined to the purchase of goods in India for the purpose of export.

(4) The income taxable in India would be only that part of the income that could be attributed to the operations carried out in India. This was a matter of computation.

(5) The Indian Liaison Office involved a ‘Permanent Establishment’ for the applicant under Article 5.1 of the DTAA.

(6) In terms of Article 7 of the DTAA only the income attributable to the Liaison Office of the applicant was taxable in India.

Aggrieved, the petitioner challenged the said order of the Authority on various grounds mentioned in special leave petition, before the Supreme Court.

The Supreme Court held that the Authority is a body exercising judicial power conferred on it by Chapter XIX-B of the Act and is a tribunal within the meaning of the expression in Articles 136 and 227 of the Constitution. The fact that subsection (1) of Section 245S makes the advance ruling pronounced by the Authority binding on the applicant, in respect of the transaction and on the Commissioner and the income tax authorities subordinate to him in respect of the applicant, would not affect the jurisdiction of either the Supreme Court under Article 136 of the Constitution or of the High Courts under Articles 226 and 227 of the Constitution to entertain a challenge to the advance ruling pronounced by the Authority. The reason for this view is that Articles 136, 226 and 227 of the Constitution are constitutional provisions vesting jurisdiction on the Supreme Court and the High Courts and a provision of an Act of legislature making the decision of the Authority final or binding could not come in the way of this Court or the High Courts to exercise jurisdiction vested under the Constitution.

The Supreme Court noted that in a recent advance ruling in Groupe Industrial Marcel Dassault, In re [2012] 340 ITR 353 (AAR), the Authority had, observed as under:

“But permitting a challenge in the High Court would become counter productive since writ petitions are likely to be pending in High Courts for years and in the case of some High Courts, even in Letters Patent Appeals and then again in the Supreme Court. It appears to be appropriate to point out that considering the object of giving an advance ruling expeditiously, it would be consistent with the object sought to be achieved, if the Supreme Court were to entertain an application for Special Leave to appeal directly from a ruling of this Authority, preliminary or final, and tender a decision thereon rather than leaving the parties to approach the High Courts for such a challenge.”

The Supreme Court after considering the aforesaid observation of the Authority, felt that it could not hold that an advance ruling of the Authority can only be challenged under Article 136 of the Constitution before this Court and not under Articles 226 and 227 of the Constitution before the High Court. The Supreme Court observed that in L. Chandra Kumar v. Union of India and Others [(1997) 3 SCC 261], a Constitution Bench of the Supreme Court has held that the power vested in the High Courts to exercise judicial superintendence over the decisions of all courts and tribunals within their respective jurisdictions was part of the basic structure of the Constitution. Therefore, to hold that an advance ruling of the authority should not be permitted to be challenged before the High Court under Articles 226 and/or 227 of the Constitution would be to negate a part of the basic structure of the Constitution. Nonetheless, the Supreme Court appreciated the apprehension of the Authority that a writ petition may remain pending in the High Court for years, first before a learned Single Judge and thereafter in Letters Patent Appeal before the Division Bench and as a result the object of Chapter XIX-B of the Act which is to enable an applicant to get an advance ruling in respect of a transaction expeditiously would be defeated. The Supreme Court, therefore, opined that when an advance ruling of the Authority is challenged before the High Court under Articles 226 and/or 227 of the Constitution, the same should be heard directly by a Division Bench of the High Court and decided as expeditiously as possible.

The Supreme Court accordingly disposed of the Special Leave Petition granting liberty to the petitioner to move the appropriate High Court under Article 226 and/or 227 of the Constitution. The Supreme Court requested the concerned High Court to ensure that the Writ Petition, if filed, is heard by the Division Bench hearing income-tax matters and further requested the Division Bench to hear and dispose of the matter as expeditiously as possible.

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Depreciation – Goodwill is an intangible asset under Explanation 3(b) of section 32(1) of the Act and is entitled to depreciation under that section.

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[CIT v. Smifs Securities Ltd. (Civil Appeal No.5961 of 2012 dated 22-8-2012)]

Entries in books of accounts – the manner in which the assessee maintains its accounts is not conclusive for deciding the nature of expenditure.

The following three questions of laws were raised before the Supreme Court:

1. Whether Stock Exchange Membership Cards are assets eligible for depreciation u/s. 32 of the Income Tax Act, 1961? Whether, on the facts and in the circumstances of the case, deletion of Rs.53,84,766/- has been made correctly?

2. Whether goodwill is an asset within the meaning of section 32 of the Income Tax Act, 1961, and whether depreciation on ‘goodwill’ is allowable under the said section?

3. The third question raised was regarding cancellation of disallowance of an amount of Rs.83,02,976/- as a bad debt.

 The Supreme Court held that the first question was covered by the decision in the case of Techno Shares and Stocks Ltd. [(2010) 327 ITR 323 (SC) ], in favour of the assessee. With regard to the second question, the Supreme Court noted that the facts were as under: In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd. with Smifs Securities Ltd. (duly sanctioned by Hon’ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd, were transferred to and vest in the company. In the process, goodwill had arisen in the books of the company.

The excess consideration paid by the assessee over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] was considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele.

The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to section 32(1) of the Income Tax Act, 1961 [‘Act’ for short]. The Supreme Court after adverting to the provisions of Explanation 3 to section 32(1) of the Act held that ‘Goodwill’ was an intangible asset under Explanation 3(b) to section 32(1) of the Act. The Supreme Court observed that in the present case, the Assessing Officer, as a matter of fact, had come to the conclusion that no amount was actually paid on account of goodwill. This was a factual finding.

The Commissioner of Income Tax (Appeals) had come to the conclusion that the authorized representatives had filed copies of the Orders of the High Court ordering amalgamation of the above two Companies; that the assets and liabilities of M/s. YSN Shares and Securities Private Limited were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee- Company stood increased. This finding had also been upheld by Income Tax Appellate Tribunal. According to the Supreme Court, there was no reason to interfere with the factual finding. The Supreme Court further observed that against the decision of ITAT, the Revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset u/s. 32 of the Act. In the circumstances, before the High Court, the Revenue had not filed an appeal on the finding of fact referred to hereinabove. So far as the third question is concerned, the Supreme Court noted that the argument on behalf of the revenue was that, since the Tax Audit Report indicated that the amounts have been incurred on capital account, the assessee was not entitled to deduction of bad debt.

 The Supreme Court observed that both the CIT(A) as well as the ITAT had concluded that the assessee had satisfied the provisions of section 36(1)(vii) of the Act. They held that bad debt claimed by the assessee was incurred in the normal course of business and, therefore, the assessee was entitled to deduction u/s. 36(1)(vii). The Supreme Court held that it is well settled now by a catena of decisions that the manner in which the assessee maintains its accounts is not conclusive for deciding the nature of expenditure.

The Supreme Court held that in the present case, the concerned finding of facts recorded by the authorities below indicated that the assessee was entitled to deduction in the course of business u/s. 36(1)(vii) of the Act.

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Interest – Whether interest is payable by the Revenue to the assessee if the aggregate of installments of Advance tax/TDS paid exceed the assessed tax is a question of law – Correctness of the judgement in Sandvik Asia Ltd. v. CIT doubted.

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[CIT v. Gujarat Flouro Chemicals SLP (Civil) No.11406/2008 dated 23-8-2012]

The question that was before the Supreme Court was – whether interest is payable by the Revenue to the assessee, if the aggregate of installments of Advance Tax/TDS paid exceeds the assessed tax? The Supreme Court observed that advance tax is leviable in the very year in which income accrues or arises. It is normally paid in three installments. A similar situation arises in the case of TDS. It is Tax Deductible at source which is also called as ‘withholding tax’ u/s. 195 of the Act. Broadly, both Advance Tax as well as TDS are based on estimation of income by the assessee.

Before the Supreme Court, the assessee relied upon the decision in Sandvik Asia Ltd. v. CIT (2006)280 ITR 643(SC). The Supreme Court noted that it was a case relating to payment of advance tax. The main issue which arose for determination in Sandvik Asia was; whether the assessee was entitled to be compensated by the Revenue for delay in paying to it the amounts admittedly due. The Supreme Court observed that the argument in Sandvik Asia on behalf of the assessee was that, it was entitled to compensation by way of interest for the delay in payments of the amounts lawfully due to it which were wrongly withheld for a long period of seventeen years and that the Division Bench of the Supreme Court vide Para 23 had held that in view of the express provisions of the Act, the assessee was entitled to compensation by way of interest for the delay in payment of the amounts lawfully due to the assessee, which were withheld wrongly by the Revenue.

The Supreme Court, with due respect to the decision in Sandvik Asia, was of the view that section 214 of the Act does not provide for payment of compensation by revenue to the assessee in whose favour a refund order has been passed. According to the Supreme Court, in Sandvik Asia, interest was ordered on the basis of equity and also on the basis of Article 265 of the Constitution.

The Supreme Court however, expressed serious doubts about the correctness of the judgment in Sandvik Asia. According to the Supreme Court, its judgment in Modi Industries Ltd. v. CIT [1995 (6) SCC 396] has correctly held that advance tax or TDS loses its identity as soon as it is adjusted against the liability created by the Assessment order and becomes tax paid pursuant to the Assessment order. The Supreme Court questioned that – if advance tax or TDS loses its identity and becomes tax paid on the passing of the assessment order then, is the assessee not entitled to interest under the relevant provisions of the Act? The Supreme Court referred to the provisions of sections 195(1), 195A, 214, 219, 237, and 244, which stood at the relevant time and were of the view that Sandvik Asia has not been correctly decided. The Supreme Court directed the Registry to place the matter before the Hon’ble Chief Justice on the administrative side for appropriate orders.

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Reassessment – An assessment cannot be reopened on the basis of change of opinion.

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[ACIT v. ICICI Securities Primary Dealership Ltd.(Civil Appeal No.5960 of 2012 dated 22-8-2012)]

The petitioner, a limited company, was engaged in the business of carrying on various non-banking financial activities. An assessment order for the assessment year 1999-2000 was passed u/s. 143(3) on 28-3-2002 determining total income at Rs.27.72 crore. A notice u/s. 148 was issued on 27-3-2006 (after expiry of four years from the end of the assessment year) for reopening assessment. In the reasons recorded for reopening the assessment, it was stated that from the accounts it was noted that petitioner had a incurred a loss in trading in share. After discussing the various entries appearing in the opening and closing stocks and purchases and sales of those stocks it was concluded that there was a loss of Rs.19.86 crore and that loss was a speculative one and not allowable as deduction.

Accordingly, it was alleged that income to the extent of Rs.19.86 crore had escaped assessment. On a writ petition filed by the petitioner before the Bombay High Court, it was held that there was nothing new which had come to the notice of the revenue. Under the proviso to section 147, it was not possible to reopen the assessment on merely a relook of the accounts. The High Court quashed the notice dated 27-3-2006 (W.P.No.1919 of 2006 dated 28-2-2006). Being aggrieved, the revenue approached the Supreme Court. The Supreme Court observed that the assessee had disclosed full details in the return in the matter of its dealing in stocks and shares. The Supreme Court noted that according to the assessee, the loss was a business loss, whereas according to the revenue, the loss incurred was a speculative loss. The Supreme Court was of the opinion that reopening of the assessment was clearly based on a change of opinion and in the circumstances, reopening of the assessment was not maintainable.

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Interest – Before any amount paid is construed to be interest, it has to be established that the same is payable in respect of debt incurred – Discounting charges paid for getting the export bill discounted is not interest within the ambit of section 2(28A) – SLP dismissed.

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[CIT v. Cargil Global Trading I.P. Ltd. (SLP (CC) No.19572 of 2011 dated 10-5-2012]

In the assessment year 2004-05, the respondentassessee filed the income tax return declaring the income at 1.14 crore. During the assessment proceedings, the Assessing Office (AO) noticed that the assessee had paid a sum of Rs.3.97 crore to its associate concern, M/s. Cargil Financial Services Asia Pvt. Ltd. (CFSA), Singapore on account of discounting charges for getting the export sale bill discounted. The AO was of the view that the discounting charges were nothing but the interest within the ambit of section 2(28A) of the Income Tax Act (for brevity ‘the Act’). Since the assessee had not deducted tax at source u/s. 195 of the Act, he invoked the provisions of section 40(a)(i) of the Act, and disallowed the sum of Rs.3.97 crore claimed by the assessee u/s. 37(1) of the Act.

CIT(A) deleted the addition holding that the discount paid by the assessee to CFSA cannot be held to be interest and therefore, provisions of section 40(a)(i) of the Act would not apply. Accordingly, he allowed the expenditure of Rs.3.97 crore as claimed by the assessee.

The Revenue did not accept the aforesaid decision of the CIT(A) and therefore, challenged the same by filing the appeal before the Tribunal, which was unsuccessful as the Tribunal affirmed the order of the CIT(A). The Tribunal observed that discounting charges were not in the nature of interest paid by the assessee, rather the assessee had received net amount of bill of exchange accepted by the purchaser after deducting amount of discount. Since CFSA was having no permanent establishment in India, it was not liable to tax in respect of such amount earned by it and therefore, the assessee was not under an obligation to deduct tax at source u/s. 195 of the Act. Accordingly, the Tribunal held that the said discounting charges could not be disallowed by the AO by invoking section 40(a)(i) of the Act.

On an appeal by the Revenue, the Delhi High Court [ITXA No.331 of 2011 dated 17-2-2011] observed that before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred. According to the High Court, on the facts appearing on record, the Tribunal had rightly held that the discounting charges paid were not in respect of any debt incurred or money borrowed. Instead, the assessee had merely discounted the sale consideration received on sale of goods.

The High Court held that no substantial question of law arose, as the matter was already settled by the dicta of the Supreme Court in Vijay Ship Breaking Corporation v. CIT [(2008) 219 CTR 639 (sc)] as well as clarification of CBDT in Circular No. 674 dated 22-3-1993 itself.

The Supreme Court dismissed the Special Leave Petition filed by the revenue against the aforesaid order of the Delhi High Court.

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Penalty – u/s. 271(1)(c) – Penalty cannot be imposed on the additions made under the normal provisions of the Act when the income is assessed u/s. 115JB –SLP dismissed.

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[CIT v. Nalwa Sons Investment Ltd. (SLP (Civil) No.18564 of 2011 dated 04-05-2012]

For the assessment year 2001-02 the respondent- assessee had filed return declaring loss at Rs.43.47 crore. Thereafter, the revised return exhibiting the income at Rs.3,86,82,128/- was filed under the provisions of section 115JB. The assessment order was framed by the Assessing Officer u/s. 143(3) at a loss of Rs.36.95 crore as per normal provisions and at book profits at Rs.4,01,63,180/- u/s. 115 JB of the Act. While doing so, various additions were made by the Assessing Officer including the following:-

a. In so far the claim of depreciation was concerned, the Assessing Officer disallowed the depreciation to the extent of Rs.32,51,906/-.

b. The addition towards the provident fund of Rs.3,030/- treating the same as income, was also made on the ground that this contribution was made belatedly by the assessee.

c. The Assessing Officer also disallowed deduction u/s. 80HHC of the Act on the ground that the assessee had not adjusted the loss incurred on manufactured and traded goods exported out of India against incentives and had claimed deduction u/s. 80HHC of the Act on 90% of the incentives.

These additions were upheld by the CIT(A).

While drawing the assessment order, the Assessing Officer also directed that penalty proceedings be initiated against the assessee by issuing a show cause notice u/s. 271(1)(c) of the Act. The show cause notice was thus given to the respondent-assessee, who submitted its reply thereto. However, the Assessing Officer was not convinced with the reply and thus, passed the order dated 28th September, 2007 imposing a penalty of Rs.90,97,415/- in respect of the aforesaid three additions, holding that the assessee had furnished inaccurate particulars of the income which fell within the purview of the section 271(1)(c) of the Act and Explanation 1 thereto.

The assessee preferred an appeal, which was allowed by the CIT (A), who set aside the penalty order. The Income Tax Appellate Tribunal affirmed the order of the CIT(A) maintaining that no penalty could have been imposed upon the assessee under the given circumstances.

On further appeal by the revenue, the Delhi High Court [ITXA No.1420 of 2009 dated 26/8/2010] observed that the judgment of the Supreme Court in Gold Coin’s has clarified that even if there are losses in a particular year, penalty can be imposed as even in that situation there can be a tax evasion. As per section 271(1)(c), the penalty can be imposed when any person has concealed the particulars of his income or furnished incorrect particulars of the income. Once this condition is satisfied, quantum of penalty is to be levied as per clause (3) of section 271(1) (c), which stipulates that the penalty shall not exceed three times “the amount of tax sought to be evaded”. The expression “the amount of tax sought to be evaded” is clarified and explained in Explanation 4 thereto, as per which it has to have the effect of reducing the loss declared in the return or converting that loss into income.

The question, however according to the High Court, in the present case, was as to whether furnishing of such wrong particulars had any effect on the amount of tax sought to be evaded. The High Court held that under the scheme of the Act, the total income of the assessee is first computed under the normal provisions of the Act and tax payable on such total income is compared with the prescribed percentage of the ‘book profits’ computed u/s. 115JB of the Act. The higher of the two amounts is regarded as total income and tax is payable with reference to such total income. If the tax payable under the normal provisions is higher, such amount is the total income of the assessee, otherwise, ‘book profits’ are deemed as the total income of the appellant in terms of section 115JB of the Act.

In the present case, the income computed as per the normal procedure was less than the income determined by legal fiction, namely ‘book profits’ u/s. 115JB of the Act. On the basis of normal provision, the income was assessed in the negative i.e. at a loss of Rs.36,95,21,018. On the other hand, assessment u/s. 115 JB of the Act resulted in calculation of profit at Rs.4,01,63,180.

The income of the assessee was thus assessed u/s. 115 JB and not under the normal provisions.

According to the High Court, judgment in the case of Gold Coin (supra), did not deal with such a situation. What was held by the Supreme Court in that case was that, even if in the income tax return filed by the assessee losses are shown, penalty could still be imposed in a case where on setting off the concealed income against any loss incurred by the assessee under other head of income or brought forward from earlier years, the total income was reduced to a figure lower than the concealed income or even a minus figure. The Supreme Court was of the opinion that the tax sought to be evaded would mean the tax chargeable, not as if it were the total income. Once this rationale to Explanation 4 given by the Supreme Court is applied in the present case, it would be difficult to sustain the penalty proceedings. Reason was simple. No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it was the deemed income assessed u/s. 115 JB of the Act which had become the basis of assessment as it was the higher of the two. Tax was thus paid on the income assessed u/s. 115 JB of the Act. Hence, when the computation was made u/s. 115 JB of the Act, the aforesaid concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all.

The Supreme Court dismissed the Special Leave Petition filed by the revenue against the aforesaid order of the Delhi High Court. CIT v. Nalwa Sons Investment Ltd.

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The mechanism set up by Supreme Court requiring clearance of the Committee on Disputes in litigation between Ministry and Ministry of Government of India, Ministry and public sector undertakings of the Government of India and public sector undertakings between themselves and also in disputes involving the State Governments and their instrumentalities recalled.

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[Electronics Corporation of India Ltd. v. Union of India & Ors., Civil Appeal No. 1883 of 2011 (arising out of S.L.P. (C) No. 2538 of 2009) dated 17-2-2011]

By Order dated 11-9-1991, reported in 1992 Supp (2) SCC 432 (ONGC and Anr. v. CCE), the Supreme Court noted that “Public sector undertakings of Central Government and the Union of India should not fight their litigations in Court”. Consequently, the Cabinet Secretary, Government of India was “called upon to handle the matter personally”. This was followed by the order dated 11-10-1991 in 1995 Suppl. (4) SCC 541 (ONGC v. CCE) where the Supreme Court directed the Government of India “to set up a Committee consisting of representatives from the Ministry of Industry, Bureau of Public Enterprises and Ministry of Law, to monitor disputes between Ministry and Ministry of Government of India, Ministry and public sector undertakings of the Government of India and public sector undertakings between themselves, to ensure that no litigation came to a Court or to a Tribunal without the matter having been first examined by the Committee and its clearance for litigation”. Thereafter, in 2004 (6) SCC 437 (ONGC v. CCE) dated 7-1-1994, the Supreme Court directed that in the absence of clearance from the ‘Committee of Secretaries’ (CoS), any legal proceeding will not be proceeded with. This was subject to the rider that appeals and petitions filed without such clearance could be filed to save limitation. It was, however, directed that the needful should be done within one month from such filing, failing which the matter would not be proceeded with. By another order dated 20-7-2007, 2007 (7) SCC 39 (ONGC v. City & Industrial Development Corpn.) the Supreme Court extended the concept of Dispute Resolution by High-Powered Committee to amicably resolve the disputes involving the State Governments and their instrumentalities. The idea behind setting up of this Committee, initially, called a ‘High-Powered Committee’ (HPC), later on called as ‘Committee of Secretaries’ (CoS) and finally termed as ‘Committee on Disputes’ (CoD) was to ensure that resources of the State are not frittered away in inter se litigations between entities of the State, which could be best resolved by an empowered CoD. The machinery contemplated was only to ensure that no litigation came to Court without the parties having had an opportunity of conciliation before an in-house committee.

In CCE v. Bharat Petroleum Corporation, a two-Judge Bench of the Supreme Court held that the working of the COD had failed and that the time had come to revisit the law. The matter was referred to a Larger Bench for reconsideration.

The matter came up before a Constitution Bench of the Supreme Court consisting of five Judges, which noted that :

Electronics Corporation of India Ltd. (‘assessee’ for short), is a Central Government Public Sector Undertaking (‘PSU’) under the control of Department of Atomic Energy, Government of India. A dispute had been raised by the Central Government (Ministry of Finance) by issuing show-cause notices to the assessee alleging that the Corporation was not entitled to avail/utilise Modvat/Cenvat credit in respect of inputs whose values stood written off. Accordingly it was proposed in the show-cause notices that the credit taken on inputs was liable to be reversed. Thus, the short point which arose for determination was whether the Central Government was right in insisting on reversal of credit taken by the assessee on inputs whose values stood written off. The Adjudicating Authority held that there was no substance in the contention of the assessee that the writeoff was made in terms of AS-2. The case of the assessee before the Commissioner of Central Excise (Adjudicating Authority) was that it was a financial requirement as prescribed in AS-2; that an inventory more than three years old had to be written off/ derated in value; that such derating in value did not mean that the inputs were unfunctionable; that the inputs were still lying in the factory and they were useful for production and therefore they were entitled to Modvat/Cenvat credit. As stated above, this argument was rejected by the Adjudicating Authority and the demand against the assessee stood confirmed. Against the order of the Adjudicating Authority, the assessee decided to challenge the same by filing an appeal before the CESTAT. Accordingly, the assessee applied before the Committee on Disputes (CoD). However, the CoD vide its decision dated 2-11-2006 refused to grant clearance, though in an identical case the CoD granted clearance to Bharat Heavy Electricals Ltd. (‘BHEL’). Accordingly, the assessee filed a writ petition No. 26573 of 2008 in the Andhra Pradesh High Court. The writ petition filed by the assessee stood dismissed. Against the order of the Andhra Pradesh High Court the assessee moved the Supreme Court by way of a special leave petition.

In a conjunct matter, Bharat Petroleum Corporation Ltd. (‘assessee’ for short) cleared the goods for sale at the outlets owned and operated by themselves known as company-owned and company-operated outlets. The assessee cleared the goods for sale at such outlets by determining the value of the goods cleared during the period February, 2000 to November, 2001 on the basis of the price at which such goods were sold from their warehouses to independent dealers, instead of determining it on the basis of the normal price and normal transaction value as per section 4(4) (b)(iii) of the Central Excise Act, 1944 (‘1944 Act’ for short) read with Rule 7 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. In short, the price adopted by the assessee which is a PSU in terms of Administered Pricing Mechanism (‘APM’) formulated by Government of India stood rejected. The Tribunal came to the conclusion that the APM adopted by the assessee was in terms of the price fixed by the Ministry of Petroleum and Natural Gas; that it was not possible for the assessee to adopt the price in terms of section 4(1)(a) of the 1944 Act; and that it was not possible to arrive at the transaction value in terms of the said section. Accordingly, the Tribunal allowed the appeal of the assessee. Aggrieved by the decision of the Tribunal, CCE went to the Supreme Court by way of Civil Appeal No. 1903 of 2008 in which the assessee preferred I.A. No. 4 of 2009 requesting the Court to dismiss the above Civil Appeal No. 1903 of 2008 filed by the Department on the ground that CoD had declined permission to the Department to pursue the said appeal.

The Supreme Court observed that the above two instances showed that the mechanism set up by the Supreme Court in its orders reported in (i) 1995 Suppl.(4) SCC 541 (ONGC v. CCE) dated 11-10- 1991; (ii) 2004 (6) SCC 437 (ONGC v. CCE) dated 7-1-1994; and (iii) 2007 (7) SCC 39 (ONGC v. City & Industrial Development Corpn.) dated 20-7-2007, needed reconsideration.

The Supreme Court held that whilst the principle and the object behind the aforestated orders was unexceptionable and laudatory, experience had shown that despite best efforts of the CoD, the mechanism has not achieved the results for which it was constituted and had in fact led to delays in litigation. The two examples given hereinabove indicated that on the same set of facts, clearance was given in one case and refused in the other. This has led a PSU to institute a SLP in the Supreme Court on the ground of discrimination. The mechanism had led to delay in filing of civil appeals causing loss of revenue. For example, in many cases of exemptions, the Industry Department gave exemption, while the same was denied by the Revenue Department. Similarly, with the enactment of regulatory laws in several cases there was overlapping of jurisdictions between authorities, such as SEBI and insurance regulator. Civil appeals lied to the Supreme Court. Stakes in such cases were huge. One could not possibly expect timely clearance by CoD. In such cases, grant of clearance to one and not to the other may result in generation of more and more litigation. The mechanism had outlived its utility. In the changed scenario indicated above, the Supreme Court was of the view that time had come under the above circumstances to recall the directions of this Court in its various Orders reported as (i) 1995 Supp (4) SCC 541, dated 11-10-1991, (ii) (2004) 6 SCC 437, dated 7-1-1994 and (iii) (2007) 7 SCC 39, dated 20-7-2007. In the circumstances, the said orders were recalled.

Delegation of Legislative Power – Two broad principles are (i) that delegation of non-essential legislative function of fixation of rate of imposts is a necessity to meet the multifarious demands of a welfare state, but while delegating such a function laying down of a clear legislative policy is pre-requisite, and (ii) while delegating the power of fixation of rate of tax, there must be in existence, inter alia, some guidance, control, safeguards and checks in the concerned Act. The question o<

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[Delhi Race Club Ltd. v. UOI (2012) 347 ITR 593 (SC)]

Licence Fee – A licence fee imposed for regulatory purposes is not conditioned by the fact that there must be a quid pro quo for the services rendered, but that, such licence fee must be reasonable and not excessive. It would again not be possible to work out with arithmetical equivalence the amount of fee which could be said to be reasonable or otherwise. If there is a broad correlation between the expenditure which the State incurs and the fees charged, the fees could be sustained as reasonable.

On 19-10-1994, the Central Government in exercise of its powers u/s. 2 of the Union Territories (Laws) Act, 1950, extended the Mysore Race Courses Licensing Act, 1952 (the Act) to the Union Territory of Delhi, as it existed then, with certain amendments. Section 4 of the said Act provided for the payment of a Licence fee. Section 11 empowered the Government to make rules. In furtherance of the power conferred u/s. 11 of the Act, by a notification dated 1-3-1985, the Administration of the Union Territory of Delhi notified the Delhi Race Course Licensing Rules, 1985. Rules 4 and 5 of the 1985 Rules laid down the procedure for submission of application for grant of licence for horse racing and the validity period of such licence, respectively. Rule 6 prescribed the rate of “licence fee”, which was Rs.2000/- per day for horse racing on which the race is held on the race course and Rs.500/- per day for arranging for wagering or betting on a horse race run on any other race course within or outside the Union Territory of Delhi. On 7-3-2001, in exercise of the powers conferred u/s. 11 of the Act, the Lt. Governor of the National Capital Territory of Delhi enacted the Delhi Race Course Licensing (Amendment) Rules, 2001 and enhanced the aforesaid licence fee rates to Rs.20,000 and Rs.5,000 respectively.

On January 31, 2002, the Commissioner of Excise, Entertainment and Luxury Tax issued a demand letter to Delhi Race Club, a body corporate, the appellant, informing them that the licence fee deposited by them was short by Rs.17,80,000 for the year 2001-02 and by Rs. 18 lakh for the year 2002-03. Validity of the demand notice was questioned by the appellant by way of a writ petition in the High Court of Delhi, on the grounds that both the notifications, dated 19th October, 1984 and 7th March, 2001, were illegal in as much as : (i) delegation of powers u/s. 11 of the Act to the Lt. Governor, to fix the licence fee without any guidelines is excessive delegation of legislative power and is therefore, ultra vires, (ii) in the absence of an element of quid pro quo, the licence fee charged was not in the nature of a fee but a tax and (iii) the ten-fold increase in licence fee was highly excessive. However, based on the arguments advanced by the learned counsel, the High Court framed two key questions, viz., (i) Is the licence fee under rule 6 of the 1985 Rules a “fee” or not? And (ii) If it is a fee, is it excessive or not?

Answering both the questions against the appellant, the High Court concluded that the licence fee in question was not a compensatory fee and consequently there was no requirement of quid pro quo; the licence fee was in the nature of a regulatory fee and therefore, would not require any quid pro quo in the form of any social service and when the impost of Rs. 2,000 and Rs. 500 in the year 1984 was not regarded by the appellant as being excessive, keeping in mind the high rate of inflation between 1984 and 2001, the enhanced rates of Rs. 20,000 and Rs. 5,000 in the year 2001 could not be said to be excessive.

The appellant’s writ petition having been dismissed, they approached the Supreme Court.

The Supreme Court, after considering authorities wherein the question as to the limits of permissible delegation of legislative power by a Legislature to an executive/another body was examined, held that from the conspectus of the views on the question of nature and extent of delegation of legislative functions by the Legislature, two board principles emerge, viz. (i) that delegation of nonessential legislative function of fixation of rate of imposts is a necessity to meet the multifarious demands of a welfare state, but while delegating such a function, laying down of a clear legislative policy is pre-requisite and (ii) while delegating the power of fixation of rate of tax, there must be in existence, inter alia, some guidance, control, safeguards and checks in the concerned Act. It is manifest that the question of application of the second principle will not arise unless the impost is a tax. Therefore, as along as the legislative policy is defined in clear terms, which provides guidance to the delegate, such delegation of a non-essential legislative function is permissible.

According to the Supreme Court therefore, the pivotal question to be determined was the nature of the impost in the present case.

The Supreme Court, after noting the precedents on the issue, held that the true test to determine the character of a levy, delineating “tax” from “fee” is the primary object of the levy and the essential purpose intended to be achieved. According to the Supreme Court, in the case before it, it was clear from the scheme of the Act that its sole aim was regulation, control and management of horse-racing. The Supreme Court observed that such a regulation is necessary in public interest to control the act of betting and wagering as well as to promote the sport in the Indian context. To achieve this purpose, licences are issued subject to compliance with the conditions laid down therein, which inter alia include maintenance of accounts and furnishing of periodical returns; amount of stakes which may be allotted for different kinds of horses; the measures to be taken for the training of the persons to become jockeys, to encourage Indian bred horses and Indian jockeys; the inclusion and association of such persons as the government may nominate as stewards or members in the conduct and management of the horse-racing. The violation of the condition of the licence or the Act is penalised under the Act, besides a provision for cognisance by a court not inferior to a Metropolitan Magistrate. To ensure compliance with these conditions, the 1985 Rules empower the District Officer or an Entertainment Tax Officer to conduct inspection of the race club at reasonable times. According to the Supreme Court, the nature of the impost was therefore not compulsory exaction of money to augment the revenue of the State but its true object was to regulate, control, manage and encourage the sport of horse racing as was distinctly spelled out in the Act and the 1985 Rules. For the purpose of enforcement, wide powers were conferred on various authorities to enable them to supervise, regulate and monitor the activities relating to the race course, with a view to secure proper enforcement of the provisions. Therefore, by applying the principles laid down in the aforesaid decisions, it was clear that the said levy was a “fee” and not “tax”.

The Supreme Court further held that a licence fee imposed for regulatory purposes is not conditioned by the fact that there must be a quid pro quo for the services rendered, but that, such licence fee must be reasonable and not excessive. It would again not be possible to work out with arithmetical equivalence the amount of fee which could be said to be reasonable or otherwise. If there is a broad correlation between the expenditure which the State incurs and the fees charged, the fees could be sustained as reasonable.

According to the Supreme Court, the licence fee levied in the present case, being regulatory in nature, the Government need not render some defined or specific services in return as long as the fee satisfies the limitation of being reasonable. The Supreme Court noted that the amount of licence fee charged from the appellant had not been challenged as being excessive. Thus, in the light of the above observations relating to inspection and other provisions of the Act, Supreme Court held that the licence fee charged had a broad co-relation with the object and purpose for which the Act and the 2001 Rules had been enacted.

The Supreme Court observed that the challenge to the constitutionality of section 11(2) of the Act was based on the premise that no guidance, check, control or safe-guard is specified in the Act. This principle, as distinguished above, applied only to the cases of delegation of the function of fixation of rate of tax and not a fee.

The Supreme Court in the conclusion observed that the challenge to the validity of section 11(2) of the Act was raised after almost 15 years of its coming into force. This appellant, since the commencement of the Act, had been regularly paying the licence fee and the present challenge was made only when quantum of the licence was increased by the Government on account of non-revision of the same since the commencement of the Act. Evidently, the inflation during this period was taken as the criterion for increasing the quantum of the fee. It was a reasonable increase keeping in view the fact that expenditure incurred by the Government in carrying out the regulatory activities for attaining the object of the Act would have proportionately increased. Accordingly, to the Supreme Court, an institution of the size of the race course should not have cloaked their objection to an increase in the rate of licence fee and present them as a challenge to the constitutionality of the charging section.

High Court – If the High Court finds that the Tribunal has not answered some issues which arose before it in an appeal, instead of itself answering those issues, it should remit the case back to the Tribunal.

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[Teknika Components v. CIT (2012) 346 ITR 570 (SC)]

The assessee-respondent filed a return for the assessment year 2000-01, declaring taxable income of Rs.1,72,980/- inter alia after claiming deduction u/s. 80IA of Rs.89,74,875/-. The assessment was completed accepting the return submitted by the assessee, except denying the deduction u/s. 80IA to the extent of Rs.1,72,985/- in respect of interest credited to the Profit & Loss Account. Since the assessee-firm was held eligible for deduction u/s. 80IA, the rate of gross profit at 75.8% was examined by the Assessing Officer.

The Commissioner of Income Tax, exercising his jurisdiction u/s. 263 passed an order setting aside the assessment order and directing the Assessing Officer to frame fresh assessment, after giving reasonable opportunity of being heard to the assessee, the effect of which was to disallow deduction granted u/s. 80IA.

The Tribunal cancelled this order of the Commissioner in an appeal filed by the assessee.

The High Court in the appeal preferred by the Department, came to the conclusion that the Tribunal had not answered some of the issues, which stood decided by the Commissioner of Income Tax u/s. 263. In the circumstances, the High Court set aside the order of the Tribunal.

Against the Order of the High Court, the assessee approached the Supreme Court by way of Special Leave Petition. On 5-1-2011, the Supreme Court permitted the Department to proceed with reassessment without prejudice to the rights and contentions of the parties. In September 2014, when the matter came up for hearing, it was pointed out to the Supreme Court that the Assessing Officer had passed a fresh order on 5-5-2011, in which he had disallowed the claim for deduction u/s. 80IA and that the assessee had preferred an appeal to the Commissioner of Income Tax (Appeals) against the said order.

The Supreme Court was of the view that, instead of the High Court itself answering the issues which were held to be not answered by the Tribunal, it ought to have remitted the case to the Tribunal which it had not done in the present case.

The Supreme Court, in the peculiar facts and circumstances of the case, directed the Commissioner of Income Tax (Appeals) to decide the matter uninfluenced by the earlier order of the Commissioner of Income Tax u/s. 263. The Supreme Court set aside the order of the High Court and disposed of the appeal accordingly.

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Central Board of Direct Taxes – Representation should not be rejected without hearing and that the case should be disposed of by a reasoned order.

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[Satyam Computer Services Ltd. v. CBDT (2012) 346 ITR 566 (SC)]

The Petitioner company was a victim of unprecedented fraud perpetrated by the former chairman and previous management of the company. Serious Fraud Investigation Office (SIFO) which investigated the fraud, found that the previous management paid taxes on fictitious income to convey a false impression that the income was genuine. As per initial quantification, sales was overstated by Rs.4,915 crore (2001-02 to 2007-08), interest income of Rs.920.14 crore was shown on non-existing fixed deposits (2001-02 to September, 2008) and non-existent interest of Rs.186.91 crore was paid on fictitious fixed deposits (2001-02 to 2007-08).

In the circumstances, Petitioner Company represented to the Central Board of Direct Taxes (CBDT) stating that income declared by the earlier management in return of income had been overstated and tax credit thereon was excessively claimed, as evident from the subsequent restatement of accounts at the instance of the Company Law Board and consequent upon investigation by the SIFO. It was the case of the company before the CBDT that the Department had acted on the basis of false claims of payment of taxes made by the previous management by rectifying the assessment and raising tax demands. The case of the petitioner was that, in the circumstances, the overstated income in the specified assessment years should be reduced.

CBDT vide order dated 10-3-2011 passed u/s. 119 rejected the representation of the company for re-quantification/reassessment of income for various years for the reasons given in the order. However, no hearing was given to the petitionercompany. Aggrieved, the petitioner–company filed a writ petition in the Andhra Pradesh High Court. The High Court directed the petitioner-company to pay Rs. 350 crore and to give bank guarantee for Rs. 267 crore, pending hearing and disposal of the writ petition. The petitioner-company filed a Special Leave Petition before the Supreme Court.

The Supreme Court was of the view that the CBDT in the peculiar facts and circumstances of the case, ought to have heard the petitioner-company which they had not done. The Supreme Court also found that the representations made by the petitionercompany required further details to be furnished and in the circumstances, it directed the petitionercompany to file within two weeks, a comprehensive petition/representation before the CBDT giving all requisite/details/particulars in support of the case for re-quantification/reassessment of income for the assessment years 2003-04 to 2008-09 and directed the CBDT to hear the petitioner-company and dispose of the case within a period of two weeks from the date of hearing by a reasoned order. The Supreme Court further required the chairman of the company to file an undertaking with the Registry of Supreme Court to furnish bank guarantee of the nationalised bank in a sum of Rs. 617 crore and on filing such undertaking, attachment levied by the Department would stand lifted. The Supreme Court disposed of the petition without expressing any opinion on the merits of the case and keeping all the contentions open.

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Appeal u/s. 260A – High Court ought to give its findings in detail – High Court should not set aside the order of the Tribunal in an appeal filed by the Department without hearing the assessee.

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[Rajesh Mahajan v. CIT (2012) 346 ITR 513 (SC)]

The appellant, an individual was a partner in M/s. Mahajan Exports, Panipat and M/s. Maspar, Panipat deriving business income, income from salary and income from house property. A search was conducted under section 132 (1) at his residential and business premises. Pursuant to a notice under section 158BC, the appellant filed his return for the block period declaring total undisclosed income at ‘nil’. The assessment was completed after scrutiny, determining total undisclosed income at ‘nil’. The said assessment order was set aside by the Commissioner u/s. 263 with a direction to make the assessment de novo on the following matters:

(a) cash found at the premises of the assessee at Panipat house,
(b) cash found at the Delhi house;
(c) unsecured loans, and
(d) fresh investment

The order of Commissioner u/s. 263 was set aside by the Tribunal, observing that the appellant had filed detailed explanation and supporting evidence on the basis of which the Assessing Officer had made due enquires while passing the assessment order, after obtaining necessary approval from his superior officer u/s. 158BC of the Act. The High Court set aside the order of the Tribunal in an appeal filed by the Department. On an appeal to the Supreme Court by the appellant, the Supreme Court noted that the appellant was not heard by the High Court and that the review application was also dismissed by the High Court.

The Supreme Court set aside the judgment of the High Court and remitted the case for de novo consideration observing that the High Court ought to have given its findings in detail, particularly on the question whether there was any error of law in the decision of the Tribunal and whether that error caused prejudice to the Revenue.

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Interest expenditure – Advances to sister concerns – Commercial expediency – S. A. Builders v. CIT needs reconsideration.

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[Addl. CIT v. Tulip Star Hotels Ltd. (SLP (CC) No.7140 of 2012 dated 30-4-2012)]

The respondent-assessee had borrowed certain funds which were utilised by the assessee to subscribe to the equity capital of the subsidiary company, namely, M/s. Tulip Star Hospitality Services Ltd. This subsidiary company used the said funds for the purpose of acquiring the Centaur Hotel, Juhu Beach, Mumbai, which is now functioning as “The Tulip Star, Mumbai”. The assessee paid interest on the borrowed money. This interest liability incurred by the assessee was claimed by it as deduction on the ground that it was business expenditure. The Assessing Officer refused to allow the expenditure.

However, the Commissioner of Income Tax (Appeals) reversed the decision of the Assessing Officer and the opinion of the Commissioner of Income Tax (Appeals) was confirmed by the Income Tax Appellate Tribunal.

The Tribunal noted that the assessee was in the business of owning, running and managing hotels. For the effective control of new hotels acquired by the assessee under its management, it had invested in a wholly owned subsidiary, namely, M/s. Tulip Star Hospitality Services Ltd. On this ground, relying upon the judgment of the Supreme Court in the case of S.A. Builders Pvt. Ltd. v. CIT [2007] 288 ITR 1, the Tribunal held that the assessee was entitled to the deduction of interest on the borrowed funds.

On an appeal, the Delhi High Court inter alia held that the expenditure incurred under the aforesaid circumstances would be treated as expenditure incurred for business purposes and was thus allowable under section 36 of the Act.

On a further appeal, the Supreme Court was of the opinion that S.A. Builders Ltd. v. Commissioner of Income Tax, reported in 288 ITR 1, needed reconsideration. The Supreme Court therefore issued notice on the SLP.

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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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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.

Writ – Non-entertainment of petitions under writ jurisdiction by the High Court when an efficacious alternative remedy is available is a rule of self-imposed limitation. It is essentially a rule of policy, convenience and discretion rather than a rule of law.

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The assessee, a Sikkim based non-Sikkimese filed his first return of income for the assessment year 1997-98. Upon assessment, it was discovered that the he had a net profit of Rs. 5,73,832/- during the assessment year 1996-97 relevant to the previous year 1995-96. Since no return was filed for the assessment year 1996-97 despite capitalising the aforesaid profit, proceedings u/s. 147 of the Act were initiated against him for the said assessment year. Accordingly, on 26th May, 1998, the notice was issued u/s. 148 of the Act. Further, the Revenue found out that as on 31st March, 1996, the assessee had brought forward closing capital of Rs. 1,73,90,397/- including that aforesaid net profit during the assessment year 1996-97. The same remained unexplained as the return of income for the assessment year 1995-96 was also not furnished by the assessee. Hence, another notice u/s. 148 was issued to the assessee for the assessment for the assessment year 1995-96, dated 30th March, 2000. The assessee did not comply with the aforesaid notices u/s. 148 of the Act and thus, a letter dated 19th January, 2001, came to be issued to the assessee as a reminder to file his returns to income for the assessment years clearly mentioning that failure to do so would lead to an ex parte assessment u/s. 144 of the Act. Thereafter, upon filing of written submissions by the assessee, notice u/s. 142(1) of the Act dated 25th June, 2001, was issued for the assessment year 1995-96 along with final show cause fixing compliance for hearing dated 9th July, 2001. The assessee sought an adjournment which was not granted and the assessments were completed ex parte u/s. 144 of the Act raising a tax demand of Rs. 2,45,87,625/- and Rs. 6,32,972/- for the assessment year 1995-96 and 1996-97, respectively by order dated 9th July, 2001 and 28th March, 2001, respectively. Further, penalty proceedings u/s. 271(1)(c) of the Act were also initiated for both assessment years.

The assessee approached the writ court challenging the aforesaid notices issued u/s. 148, dated 26th May, 1998 and 30th March, 2000 and the subsequent assessment orders dated 9th July, 2001 and 28th March, 2001. The issue raised before the writ court was whether the income of the non-Sikkimese residing in Sikkim was taxable u/s. of the Act. The said question was referred to a Committee for its consideration and the writ petition was disposed of as withdrawn with the direction to maintain status quo in the matter till the declaration of final decision by the Committee, by order dated July 21, 2005. In the meanwhile, section 10(26AAA) of the Act was inserted by section 4 of the Finance Act, 2008, whereby certain income accruing or arising to a Sikkimese individual was exempted from tax. Thereafter the Central Board of Direct Taxes (for short “the Board”) issued Instruction No.8, dated 26th July, 2008 in respect of tax liability of the income accruing or arising to a non- Sikkimese individual residing in Sikkim. In the light of the aforesaid amendment and instruction, the writ court by order dated 15th July, 2009, reiterated.

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Section 17 incentive bonus received by LIC Development Officer to be treated as salary and no expenses deductible.

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The appellant, T.K. Ginarajan, Development Officer in the LIC, claimed deduction of 40 % of the incentive bonus paid to him in the return of income-tax for the various years prior to 1st April, 1989, on the ground that he had incurred expenditure to the extent of 40 % of the incentive bonus for canvassing business.

The claim for exclusion of 40 % of the incentive bonus towards the expenditure was declined by the Income-tax Officer. The Commissioner of Income-tax (Appeals) dismissed the appeal. However, the Incometax Appellate Tribunal held in favour of the assessee. But the High Court was in favour of the Revenue.

The Supreme Court noted that LIC of India had requested the Central Board of Direct Taxes (hereinafter referred to as “the CBDT”) for a clarification on deduction explaining that the Development Officer had actually incurred some expenditure in the performance of their duty, to the tune of at least 40 % of the incentive bonus paid to them. However, the CBDT affirmed that the incentive bonus paid by the LIC to the Development Officers formed part of their income towards salary. To quote :
“ Such portion of the incentive bonus which is actually spent by the Development Officer for duties of office can still be exempted from tax if the LIC makes the payment against the expenses incurred by the Development Officer by way of reimbursement of expenses. In that case, such reimbursement will not form a part of the salary of the Development Officer and only the incentive bonus will appear in their salary certificate. LIC has not certified that a part of the incentive bonus is against the expenses incurred by the Development Officers by way of reimbursement of expenses. If such a part is certified and that part of the salary and that part of the incentive bonus which is not certified will appear in the salary certificate. Hence, no deduction is contemplated from the incentive bonus, which finds a place in the salary certificates…”

The Supreme Court further noted that, however, with effect from 1st April, 1989, the LIC itself issued a clarification to the effect that the Development Officers would be entitled to claim reimbursement to the extent of 30 % of the incentive bonus granted to them.

The Supreme Court observed that thus, the dispute was confined only to the period prior to 1st April, 1989, and, thereafter, the Development Officers were entitled to the reimbursement of actual expenses incurred by them, to the extent of 30 %. In other words, after 1st April, 1989, only that part of the incentive bonus after reimbursing the expenses to the extent of 30 % would appear in the salary certificate. What is the fate of the incentive bonus to the Development Officers in LIC prior to 1st April, 1989, for the purpose of income tax was therefore the question to be considered in this case.

The Supreme Court held that compartmentalisation of income under various heads and computation of the taxable portion strictly in accordance with the formula of deductions, rebates and allowances are to be done only as per the scheme provided under the Act. The appellant being a salaried person, the incentive bonus received by him prior to 1st April, 1989, had to be treated as salary and he was entitled only for the permissible deductions u/s. 16 of the Act. The expenses incurred in the performance of duty as Development Officer for generating the business so as to make him eligible for the incentive bonus was not a permissible deduction and, hence, the same was eligible to tax. According to the Supreme Court, there was no merit in the appeal of the Appellant. The appeal was accordingly dismissed.

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Penalty – Concealment of income – Suit for recovery by bank settled at Rs.42,45,477 as against Rs.52,07,873 outstanding in the assessee’s books of account – Not a case to which section 271(1)(c) would apply.

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Northland Development and Hotel Corpn. V. CIT (2012) 349 ITR 363 (SC)

The assessee took loan from Citi Bank N.A. to buy a hotel (capital asset). Default was committed in repayment of loan. Suit was filed for recovery, which was settled by signing consent decree on 30th April, 1982. The consent decree recited that the borrowers acknowledged their liability to the plaintiff-bank in the sum of Rs.42,45,477, being the outstanding amount in the loan account of the bank as on 30th April, 1982. However, in the books of account of the assessee, the outstanding amount repayable to the bank was Rs.52,07,873 as on 30th April, 1982. Consequently, the Department came to the conclusion that there was a waiver by the bank to the extent of approximately rupees ten lakhs. This amount was sought to be taxed by the Department. The Department also initiated proceedings u/s. 271(1)(c) of the Incometax Act, 1961, against the assessee. The Supreme Court observed that, in the books of account of the assessee, the outstanding amount, as on 30th April, 1982, was Rs.52,07,873, including interest. However, the decree in favour of the bank was for Rs.42,45,477, because that was the amount indicated as the outstanding amount due and payable by the assessee to the bank in its books of account.

According to the Supreme Court it appeared that the bank had not calculated the interest over the years possibly for the reason that, in its accounts, this amount was classified as “NPA”. The Supreme Court held that in the peculiar facts and circumstances of this case, section 271(1)(c) of the Income-tax Act, 1961, was not applicable.

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Appeal to High Court – High Court should not overrule the findings of the Tribunal and Commissioner (Appeals) on the factual aspects and in case of doubt should remit the matter for deciding the matter afresh after giving reasonable opportunity to the assessee.

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M.K. Shanmugam vs. CIT [2012] 349 ITR 384 (SC)

The assessee was engaged in the business of jewellery and money-lending. He was the proprietor of M/s. Sri Velmurugan Financiers, M/s. Sri Raja Jewellery, M/s. Sri Raja Silks and M/s. M.K.S. Finance. He was also the managing director of M/s. Shanmugaraja Chit Funds Pvt. Ltd. and partner in M/s. Sri Raja Chit Funds, M/s. Sri Velmurugan Chit Funds, Coimbatore and M/s. United Fabrics, Tiruppur. A search was conducted in the business premises of the assessee on 31st January, 2001, u/s. 132 of the Income-tax Act, 1961, hereinafter referred to as “the Act”, by the Investigation Unit II, Coimbatore. During the course of the search, various incriminating documents were seized, which indicated that the assessee did not disclose the correct income earned by him in the returns filed by him before conducting such a search. Before the date of the search, the assessee filed returns of income only up to the assessment year 1998-99. Therefore, a notice u/s. 158BC of the Act was issued to the assessee on 28th February, 2001. The search was concluded on 13th March, 2001. On 18th September, 2002, block return in Form 2B was filed by the assessee for the period from 1st April, 1990 to 13th March, 2001, declaring a loss of Rs. 16,47,844. In response to the notices and the letters issued, the assessee made written as well as oral submissions in respect of his income and investments during the said block period. The documents seized from his business premises and the documents produced by him were scrutinised and after hearing the assessee, the Assessing Officer completed the assessment. The Assessing Officer made additions of (i) Rs. 42 lakh on account on-money received from sale of Raja Street properties; (ii) Rs. 60,72,900 being bogus outstanding deposit in jewellery; (iii) Rs. 3,83,000 being bogus outstanding fixed deposits in Sri Velmurugan Finances; (iv) Rs. 26,63,130 in respect of unexplained payments made to various parties, and (v) Rs. 2,00,000/- being sale proceeds of A.P. Lodge.

As against the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) II, Coimbatore, who by order dated 25th March, 2004, allowed the appeal in part. Aggrieved by the said order of the Commissioner of Income Tax (Appeals), the Revenue filed an appeal before the Income Tax Appellate Tribunal and the assessee filed cross-objection in respect of the disallowed portion. The Income Tax Appellate Tribunal, by its common order dated 23rd November, 2006, dismissed the appeal filed by the Revenue and partly allowed the cross objection filed by the assessee. Challenging the same, the Revenue filed appeal before the High Court.

The High Court allowing the appeal held that
(i) the Assessing Officer had not committed any error in making the addition of Rs. 42 lakh, while completing the block assessment,
(ii) out of Rs. 60,92,900/- a sum of Rs. 21,21,400/- was assessable as undisclosed income,

(iii) the addition of Rs. 13,83,000 was justified and
(iv) the amount of Rs. 26,63,130/- was rightly treated as undisclosed income [349 ITR 369 (Mad)].

On appeal to the Supreme Court by the assessee, the Apex Court, after going through the judgment of the High Court, observed that the High Court had overruled the decisions of the Income Tax Appellate Tribunal and of the Commissioner of Income Tax (Appeals) on factual aspects also. By way of illustration, the Supreme Court pointed out that the High Court had stated that cash flow statements submitted by the assessee were not supported by the documents. According to the Supreme Court, in such a case, the High Court should have remitted the case to the Commissioner of Income Tax (Appeals) giving opportunity to the assessee to produce relevant documents. The Supreme Court, for the aforestated reasons, set aside the judgement of the High Court and remitted the case to the Commissioner of Income Tax (Appeals), to decide the matter uninfluenced by the judgment of the High Court.

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Business Expenditure – Disallowance under section 40A(9) – The Supreme Court refrained from going into the scope and applicability of section 40A(9) when the proper foundation of facts had not been laid.

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Sandur Manganese And Iron Ores Ltd. vs. CIT [2012] 349 ITR 386 (SC)

The assessee, a limited company engaged in the business of extraction of manganese and iron ore had claimed in the return of income filed for the assessment years 1985-86, 1986-87, 1989-90, 1990-91 and 1992-93, deductions for the payments made to Sandur Residential School and Sandur Educational Society.

In the orders of assessments passed for the assessment years 1985-86, 1986-87, 1989-90, 1990-91 and 1992-93, the Assessing Officer disallowed the deductions claimed for the payments made to Sandur Residential School and Sandur Educational Society by applying the provisions of section 40A(9) of the Act r.w.s. 40A(10) of the Act.

The assessee after exhausting the remedy of the first appeal before the Appellate Commissioner, filed the second appeal before the Income Tax Appellate Tribunal. The Tribunal allowed the deductions claimed, on the ground that the expenses had been incurred fully and exclusively for the purpose of business and welfare of the employees’ children. Therefore, the deduction was allowable for the assessment year 1983-84 in view of the non-obstante clause of section 40A(10) of the Act and for the assessment years 1985-86 till 1992-93 in view of section 37(1) of the Act. The Tribunal placed reliance on the decision in the case of Mysore Kirloskar Ltd. vs. CIT [1987] 166 ITR 836 (Karn).

The Tribunal inter alia referred the following question of law to the High Court for its consideration and opinion.

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in allowing the payments made by the assessee to Sandur Residential School and Sandur Educational Society as business expenditure for the assessment years 1985-86, 1986-87, 1989-90, 1990-91 and 1992-93?” The High Court held that a reading of the Budget speech of the Finance Minister would indicate that under the provisions of section 40A(9) of the Act, no deduction is permissible on the contribution made by the corporate bodies to the so-called welfare funds, except the contributions made to such funds which are established under the statute or an approved provident fund, superannuation fund or gratuity fund.

The High Court did not accept the view expressed by the Kerala High Court in P. Balakrishnan, CIT v. Travancore Cochin Chemicals Ltd. (2000) 243 ITR 284 (Ker) and by the Bombay High Court in CIT v. Bharat Petroleum Corporation Ltd. (2001) 252 ITR 431 (Bom) in view of the decision of the Supreme Court in Larsen and Toubro Institute of Technology v. All India Council for Technical Education, AIR 1995 (SC) 1585. The High Court answered the question in favour of the Revenue and against the assessee.

On an appeal to the Supreme Court, on the issue of the allowability of the sum spent as welfare expenses towards providing education to its employees’ children, the Supreme Court observed that section 40A(9) was inserted as a measure for combating tax avoidance. The application of section 40A(9) would come into play only after the assessee has established the basic facts. According to the Supreme Court, the facts were not clear inasmuch as the assessee had made payments to other educational institutions and also not only to the school or the society promoted by the assessee. According to the Supreme Court, from each assessment year, the Tribunal would have to record a separate finding as to whether the claim for deduction was being made for payments to the school promoted by the assessee or to some other educational institutions/ schools and thereafter apply section 40A(9). The Supreme Court accordingly restored the matter to Tribunal, for de novo consideration for each of the assessment years and directing it to give a clear bifurcation between payments made by the assessee to Sandur Residential School and Sandur Education Society and payments made to schools other than the above two institutions. The Supreme Court however, refrained from going into the scope and applicability of section 40A(9) in the absence of proper facts.

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Gift Tax – Deemed Gift – Whether there is deemed gift of bonus shares (retained by the Donee) by the Donor in the year of revocation of gift of shares with proviso that gift shall not include bonus shares? – Matter remanded.

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Satya Nand Munjal vs. CGT (2013) 350 ITR 640(SC)

On 20th February, 1982, the assessee, being the absolute owner of 6000 fully paid up equity shares of the face value of Rs. 25 each of M/s. Hero Cycles (P) Ltd., executed a deed of revocable transfer in favour of M/s. Yogesh Chandran and Brothers Associates (the transferee). Under the deed the assessee could, on completion of 74 months from the date of transfer but before the expiry of 82 months from the said date, exercise the power of revoking the gift. In other words, the assessee left a window of eight months within which the gift could be revoked.

The deed of revocable transfer specifically stated that the gift shall not include any bonus shares or right shares received and/or accruing or coming to the transferee from M/s. Hero Cycles (P) Ltd. (the company) by virtue of ownership or by virtue of the shares gifted by the assessee and standing in the name of the transferee. Effectively therefore, only a gift of 6,000 equity shares was made by the assessee to the transferee.

On 29th September, 1982, the company issued bonus shares and since the transferee was a holder of the gifted equity shares, 4,000 bonus shares of the said company were allotted to the transferee by the company. Similarly, on 31st May, 1986, another 10,000 bonus shares were allotted to the transferee by the company. 

Thereafter, during the window of eight months, the assessee revoked the gift on 15th June, 1988, with the result that the 6,000 shares gifted to the transferee came back to the assessee. However, the 14,000 bonus shares allotted to the transfree while it was the holder of the equity shares of the company continued with the transferee.

Assessment proceedings for the assessment year 1982-83

For the assessment year 1982-83, the Gift-tax Officer passed an assessment order on 17th February 1987, in respect of the assessee. He held that the revocable transaction entered into by the assessee was only for the purpose of reducing the tax liability. As such, it could not be accepted as a valid gift. For arriving at this conclusion, the Assessing Officer relied upon McDowell and Co. Ltd. vs. CTO [1985] 154 ITR 148 (SC). Accordingly, the Assessing Officer, while holding the gift to be void, made the assessment on a protective basis.

Feeling aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Gift Tax (Appeals), but found no success. The Commissioner of Gift-tax (Appeals) however, held that since the gift was void, a protective assessment could not be made.

The assessee then preferred a further appeal to the Tribunal and by its order dated 23rd August 1991, allowing the appeal; the Tribunal held that the revocable gift to be valid. It was noted the concept of a revocable transfer by way of gift was recognised by section 6(2) of the Gift-tax Act, 1958 (“the Act”). The value of the gift in such a case was to to calculated in terms of rule 11 of the Gift-tax Rules 1958.

Feeling aggrieved by the decision of the Tribunal, the Revenue took up the matter in appeal before the Punjab and Haryana High Court. By its judgement and order in CGT vs. Satya Nand Munjal [2002] 256 ITR 516 (P&H) the High Court dismissed the appeal and held:

“It is a legitimate attempt on the part of the assessee to save money by following a legal method. If on account of a lacuna in the law or otherwise the assessee is able to avoid payment of tax within the letter of law, it cannot be said that the action is void because it is intended to save payment of tax. So long as the law exists in its present form, the taxpayer is entitled to take its advantage. We find no ground to accept the contention that merely because the gift was made with the purpose of saving on payment of wealth tax, it needs to be ignored.”

Assessment proceedings for the assessment year 1989-90

On 30th January, 1996, the Gift-tax Officer issued a notice to the assessee u/s. 16(1) of the Act to the effect that for the assessment year 1989-90 the gift made by the assessee was chargeable to gift-tax and that it had escaped assessment year. The assessee responded to the notice by simply stating that there is no gift that had escaped assessment.

On 24th March, 1998, the Assessing Officer passed a reassessment order for the assessment year 1989-90. While doing so, he framed two issues for consideration: firstly, whether the transferee becomes the owner of the bonus shares particularly because the shares have been received by it as a result of a revocable transfer; secondly, whether the bonus shares received by the transferee could be described as a benefit by the transferee from the transferred shares.

The Assessing Officer held that the transferee does not become the owner of the gifted shares until the transfer is an irrevocable transfer. Proceedings on this basis, it was held that the 14,000 bonus shares allotted to the transferee were a part and parcel of the gifted shares and the assessee only took back 6,000 shares from the transferee pursuant to the revocable gift. Consequently, it was held that the assessee had surrendered his right to get back 14,000 bonus shares which were treated as a gift by the assessee to the transferee in view of the provisions of section 4(1)(c) of the Act. The assessee was taxed accordingly.

Feeling aggrieved by the reassessment order, the assessee preferred an appeal to the Commissioner of Gift-tax (Appeals). By his order dated 8th September, 1998, the Commissioner held that since there was no regular transfer of the bonus shares, the transferee could not claim any ownership of the shares. The Commissioner also referred to McDowell and Co. Ltd. and held that the assessee had carefully planned his affairs in such a manner as to deprive the Revenue of a substantial amount of gift-tax. The reassessment order was accordingly upheld.

The assessee then took up the matter with the Tribunal which held in its order dated 23rd May, 2000, that in view of the assessment to gift-tax made in respect of the assessee for the assessment year 1982-83, the notice issued u/s. 16(1) of the Act was merely a change of opinion and, as such the reassessment proceedings could not have been taken up. On the merits of the case, it was noted that neither the dividend income on the bonus shares nor their value had been taxed in the hands of the assessee. Consequently, the assessee was liable to succeed on the merits of the case also. The gift-tax reassessment was accordingly quashed by the Tribunal. The Revenue then came up in appeal before the High Court with the following substantial question of law:

“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in quashing the gift tax assessment in the assessee’s case?”

In the impugned order, the High Court held that the assessee was liable to gift-tax on the value of the bonus shares which were a gift made by the assessee to the transferee. It was held that the bonus shares were income from the original shares by relying upon Escorts Farms (Ramgarh) Ltd. vs. CIT [1996] 222 ITR 509 (SC). Accordingly, the order of the Tribunal was set aside and the reassessment order upheld.

On appeal to the Supreme Court by the assessee, the Supreme Court observed that the fundamental question before the High Court was whether there was in fact a gift of 14,000 bonus shares made by the assessee to the transferee. According to the Supreme Court the answer to this question lay in the interpretation of section 4(1)(c) of the Act, but a perusal of the impugned judgment and order facially indicated that there had been no consideration of the provisions of section 4(1) (c) of the Act.

The submission of the learned counsel for the assessee is that on an interpretation of section 4(1)(c) of the Act, it could not be said by any stretch of imagination, that the assessee had made a gift of 14,000 bonus shares to the transferee in the previous year relevant to the assessment year 1989-90.

The Supreme Court however, was not inclined to decide this issue finally since it did not have the view of the High Court on the interpretation of section 4(1)(c) of the Act. Nor did it have the view of the High Court on the applicability or otherwise of the principle laid down in McDowell and Co. Ltd.

As far as the applicability of Escorts Farms is concerned, the Supreme Court observed that the question that arose for consideration in that case was the determination of the cost of acquisition of the original shares when bonus shares are subsequently issued. That is the second part of section 4(1)(c) of the Act and that question would arise (if at all) only after finding is given by the High Court on the first part of section 4(1)(c) of the Act.

Under the circumstances, the Supreme Court remanded the matter for de novo consideration by the High Court keeping in mind the provisions of section 4(1)(c) of the Act as well as the orders passed in the case of the assessee for the assessment year 1982-83.

Depreciation – Assessee is entitled to depreciation in respect of vehicles financed by it but registered in the name of third parties and is eligible to claim it at a higher rate where such vehicles are used in the business of running on hire.

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I.C.D.S. Ltd. vs. CIT & Anr. (2013) 350 ITR 527 (SC)

The assessee a public limited company, classified by the Reserve Bank of India (RBI) as a non-banking finance company was engaged in the business of hire purchase, leasing and real estate, etc. The vehicles, on which depreciation was claimed, were stated to have been purchased by the assessee against direct payment to the manufactures. The assessee as a part of its business, leased out their vehicles to its customers and therefore, had no physical affiliation with the vehicles. In fact, lesse were registered as the owners of the vehicles, in the certificate of registration issued under the Motor Vehicles Act, 1988 (hereinafter referred to as “the MV Act”).

In its return of income for the relevant assessment years, the assessee claimed, among other heads, depreciation in relation to certain assets, (additions made to the trucks) which, as explained above, had been financed by the assessee but registered in the name of third parties. The assessee also claimed depreciation at the higher rate on the ground that the vehicles were used in the business of running on hire.

The Assessing Officer disallowed claims, both of depreciation and higher rate, on the ground that the assessee’s use of these vehicles was only by way of leasing out to other and not as actual user of the vehicles in the business of running them on hire. It had merely financed the purchase of these assets and was neither the owner nor used of these assets. Aggrieved, the assessee preferred appeals to the Commissioner of Income-tax (Appeals). In so far as the question of depreciation at normal rate was concerned, the Commissioner (Appeals) agreed with the assessee. However, the assessee’s claim for depreciation at higher rate did not find favour with the Commissioner.

Being aggrieved, both the assessee and the Revenue carried the matter further in appeal before the Income-tax Appellate Tribunal (for short “the Tribunal”). The Tribunal agreed with the assessee on both the counts.

Being aggrieved, the Revenue preferred an appeal to the Bombay High Court u/s. 260A of the Act. The High Court framed the following substantial questions of law for its adjudication :

“Whether the appellant (assessee) is the owner of the vehicles which are leased out by it to its customers and whether the appellant (assessee) is entitled to the higher rate of depreciation on the said vehicles, on the ground that they were hired out to the appellant’s customers.”

Answering both the questions in favour of the Revenue, the High Court held that in view of the fact that the vehicles were not registered in the name of the assessee, and that the assessee had only financed the transaction, it could not be held to be the owner of the vehicles, and thus, was not entitled do claim depreciation in respect of these vehicles.

On an appeal to the Supreme Court by the assessee, it was held that the provision on depreciation in the Act reads that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. Therefore, it imposes a twin requirement of “ownership” and “usage for business” for a successful claim u/s. 32 of the Act.

Before the Supreme Court, the Revenue attacked both legs of this portion of the section by contending: (i) that the assessee is not the owner of the vehicles in question, and (ii) that the assessee did not use these trucks in the course of its business. It was argued that depreciation can be claimed by an assessee only in a case where the assessee is both the owner and user of the asset.

The Supreme Court dealt with the second contention before considering the first. The Revenue argued before the Supreme Court that since the lessees were actually using the vehicles, they were the ones entitled to claim depreciation and not the assessee. The Supreme Court was not persuaded to agree with the argument. According to the Supreme Court, the section requires that the assessee must use the asset for the “purposes of business”. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilised for the purpose of business of the assessee, the requirement of section 32 will stand satisfied notwithstanding non-usage of the asset itself by the assessee. The Supreme Court held that in the present case, the assessee was a leasing company which leased out trucks that it purchased. Therefore, on a combined reading of section 2(13) and section 2(24) of the Act, the income derived from leasing of the trucks would be business income or income derived in the course of business, and has been so assessed. Hence, it fulfilled the aforesaid second requirement of section 32 of the Act, viz., that the asset must be used in the course of business. The assessee did use the vehicles in the courses of its leasing business. In the opinion of the Supreme Court, the fact that the trucks themselves were not used the assessee was irrelevant for the purpose of the section.

Dealing with the first requirement, i.e., the issue of ownership, the Supreme Court held that no depreciation allowance is granted in respect of any capital expenditure which the assessee may be obliged to incur on the property of other. Therefore, the entire case hangs on the question of ownership. If the assessee is the owner of the vehicles, then he will be entitled to the claim on depreciation, otherwise, not.

The Supreme Court noted that definitions of ‘owner’, ‘ownership’ and ‘own’ given in Black’s Law Dictionary (Sixth Edition) and observed that these definitions essentially made ownership a function of legal right or title against the rest of the world. However, as seen therein, it is “nomen generalissimum, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied.”

According to the Supreme Court scrutiny of the material facts at hand raised a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer.

The Supreme Court noted that the Revenue’s objection to the claim of the assessee was founded on the lease agreement. It argued that at the end of the lease period, the ownership of the vehicle is transferred to the lessee at a nominal value not exceeding 1 per cent of the original cost of the vehicle, making the assessee in effect a financier. However, the Supreme Court was not persuaded to agree with the Revenue. According to the Supreme Court as long as the assessee had a right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eyes of law. A scrutiny of the sale agreement could not be the basis of raising question against the ownership of the vehicle. The clues qua ownership lie in the lease agreement itself, which clearly pointed in favour of the assessee.

The Supreme Court observed that the only hindrance to the claim of the assessee, which was also the lynchpin of the case of the Revenue, was section 2(30) of the Motor Vehicles Act, which defines ownership as follows:

‘Owner’ means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and in relation to a motor vehicle which is the subject or hire-purchase agreement, or a agreement of lease or an agreement of a hypothecation, the person in possession of the vehicle under that agreement.”

The Supreme Court noted that the general open-ing words of the aforesaid section 2(30) say that the owner of a motor vehicle is the one in whose name it is registered, which, in the present case, is the lessee. The subsequent specific statement on leasing agreements states that in respect of a vehicle given on lease, the lessee who is in possession shall be the owner. The Revenue before the Supreme Court thus, argued that in case of ownership of vehicles, the test of ownership is the registration and certification. Since the certificates were in the name of the lessee, they would be the legal owners of the vehicles and the ones entitled to claim deprecation. Therefore, the general and specific statements on ownership construe ownership in favour of the lessee, and, hence, were in favour of the Revenue.

According to the Supreme Court, there was no merit in the Revenue’s arguments for more than one reason:

(i)    Section 2(30) is a deeming provision that creates a legal fiction of ownership in favour of lessee only for the purpose of the Motor Vehicles Act. It defines ownership for the subsequent provisions of the Motor Vehicles Act, not for the purpose of law in general. It serves more as a guide to what terms in the Motor Vehicles Act mean. Therefore, if the Motor Vehicles Act at any point uses the term owner in any section, it means the one in whose name the vehicle is registered and in the case of a lease agreement, the lessee. That is all. It is not a statement of law on ownership in general. Perhaps, the repository of a general statement law on ownership may be the Sale of Goods Act;

ii)    Section 2(30) of the Motor Vehicles Act must be read in consonance with s/s. (4) and (5) of section 51 of the Motor Vehicles Act. The Motor Vehicles Act in terms of s/s. (4) and (5) of section 51 mandates that during the period of lease, the vehicle be registered, in the certificate of registration, in the name of the lessee and, on conclusion of the lease period, the vehicle be registered in the name of the lessor as owner. The section leaves no choice to the lessor but to allow the vehicle to be registered in the name of the lessee. Thus, no inference can be drawn from the registration certificate as to ownership of the legal title of the vehicle; and

(iii)    If the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which, as specifically recorded in the order of the Appellate Tribunal, was not done. It would be a strange situation to have no claim of depreciation in case of particular depreciable asset due to a vacuum of ownership. The entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the leassee. This reaffirms the posision that the assessee is in fact that owner of the vehicle, in so far as section 32 of the Act is concerned.

Therefore, in the facts of the present case, the Supreme Court held that the lessor, i.e., the assessee was the owner of the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of section 32 of the Act, and, hence, was entitled to claim depreciation in respect of additions made to the trucks, which were leased out.

With regard to the claim of the assessee for a higher rate of depreciation, the Supreme Court held that the import of the same term “purposes of business”, used in the second proviso to section 32(1) of the Act gained significance. According to the Supreme Court the interpretation of these words would not be any different from that which it ascribed to them earlier, u/s. 32(1) of the Act. Therefore, the assessee fulfilled even the requirements for a claim of a higher rate of depreciation, and hence, was entitled to the same.

In this regard, the Supreme Court inter alia endorsed the following observations of the Tribunal, which clinched the issue in favour of the assessee.

“15. The Central Board of Direct Taxes, vide Circular No.652, dated 14th June, 1993, has clarified that the higher rate of 40 per cent in case of lorries, etc., plying on hire shall not apply if the vehicle is used in a non-hiring business of the assessee. This circular cannot be read out of its context to deny higher appreciation in case of leased vehicles when the actual use in hiring business.

Perhaps, the author meant that when the actual use of the vehicle is in hire business, it is entitled for depreciation at a higher rate.”

Search and seizure – Block Assessment – Undisclosed Income – If the search is conducted after the expiry of the due date of filing return, payment of advance tax or deduction of tax at source is irrelevant in construing the intention of the assessee to disclose income – The ‘disclosure of income’ is disclosure of total income in a valid return u/s. 139.

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CIT vs. A. R. Enterprises, (2013) 350 ITR 489 (SC)

The assessee firm came into existence on 25th June 1992. On 23rd February, 1996, a search operation u/s. 132 of the Act was carried out at the premises of another concern, viz., M/s. A.R. Mercantile P. Ltd. During the course of the search, certain books and documents pertaining to the assessee, i.e., M/s. A.R. Enterprises, were seized. On scrutiny, the Assessing Officer found that though the assessee had taxable income for the assessment year 1995-96, no return of income had been filed (due to be filed on or before 31st October, 1995) till the date of the search. Based on the material seized by virtue of the aforesaid search, the Assessing Officer was satisfied that the assessee had not disclosed its income pertaining to the assessment year 1995-96. Accordingly (without recording any reasons for his satisfaction), he initiated action u/s. 158BD of the Act requiring the assessee to file its return of income. The assessee, after filing return for the block period (ten years preceding the previous years), which covered the assessment years 1993-94 to 1995- 96, pointed out that it had already filed returns for the assessment years 1993-94 and 1994-95. It objected to action initiated under Chapter XTV-B of the Act on the ground that in relation to the assessment year 1995-96, advance tax had already been paid in three installments and, therefore, income for that period could not be deemed to be undisclosed.

Rejecting the plea of the assessee, the Assessing Officer formed the opinion that the assessee had failed to file the return as on the date of search, and the seized documents did show income, which had not been or would not have been declared. Accordingly, he proceeded to compute the total undisclosed income for the block period 1993-94 to 1995-96 (up to the date of search), treating the income returned by the assessee for the period 1995-96 as nil, as stipulated in section 158BB(1)(c) of the Act.

Against the said order, the assessee preferred an appeal before the Tribunal. Accepting the stand of the assessee, the Tribunal allowed the appeal, and held that having paid the advance tax, the assessee had disclosed his income for the relevant assessment year.

Aggrieved, the Revenue preferred an appeal before the High Court of Madras u/s. 260A of the Act, questioning the validity of the order of the Tribunal.

Before the High Court, the stand of the Revenue was that since the return for the assessment year 1995-96 had not filed by the due date, by filing the return after the search, the assessee could not escape the consequences as stipulated in Chapter XIV-B of the Act. It was contended that payment of advance tax by itself did not establish the intention to disclose the income.

The Revenue’s plea did not find favour with the High Court. It observed that payment of advance tax itself necessarily implies disclosure of the income on which the advance is paid.

The short question for consideration before the Supreme Court was therefore whether payment of advance tax by an assessee would by itself tantamount to disclosure of income for the relevant assessment year and whether such income can be treated as undisclosed income for the purpose of application of Chapter XIV-B of the Act?

The Supreme Court held that “undisclosed income” is defined by section 158B as that income “which has not been or would not have been disclosed for the purposes of this Act”. The Legislature has chosen to define “undisclosed income” in terms of income not disclosed, without providing any definition of “disclosure” of income in the first place. The Supreme Court was of the view that the only way of disclosing income, on the part of an assessee, is through filing of a return, as stipulated in the Act, and, therefore, an “undisclosed income” signifies income not stated in the return filed. According to the Supreme Court, it seemed that the Legislature had clearly carved out two scenarios for income to be deemed as undisclosed : (i) where the income has clearly not been disclosed, and (ii) where the income would not have been disclosed. If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act and, hence, subject to the machinery provisions of Chapter XIV-B. The second category viz, where income would not have been disclosed, contemplates the likelihood of disclosure, it is a presumption of the intention of the assessee since in concluding that as assessee would or would not have disclosed income, one is ipso facto making a statement with respect to whether or not the assessee possessed the intention to do the same. To gauge this, however, reliance must be placed on the surrounding facts and circumstances of the case.

One such fact, as claimed by the the assessee, is the payment of advance tax. However, in the opinion of the Supreme Court, the degree of its material significance depended on the time at which the search is conducted in relation to the due date for filing return. Depending on which side of the due date the search was conducted, material significance of payment of advance taxes vacillated in construing the intention of the assessee. If the search was conducted after the expiry of the due date for filing return, payment of advance tax was irrelevant in construing the intention of the assessee to disclose income. Such a situation would find place which the first category carved out by section 158B of the Act, i.e. where income has clearly not been disclosed. The existence of an intention to disclose did not arise since, as held earlier, the opportunity of disclosure had lapsed, i.e., through filing or return of income by the due date. If, on the other hand, search was conducted prior to the due date for filing return, the opportunity to disclose income or, in other words, to file return and disclose income still existed. In which case, payment of advance tax may be a material fact for deciding whether an assessee intended to disclose. An assessee is entitled to make the legitimate claim that even though the search or the documents recovered, show an income earned by him, he has paid advance tax for the relevant assessment year and has an opportunity to declare the total income, in the return of income, which he would file by the due date. Hence, the fulcrum of such a decision is the due date for filing of return of income visà- vis date of search. Payment of advance tax may be a relevant factor in construing the intention to disclose income or filing return as long as the assessee continues to have an opportunity to file return and disclose his income and not past the due date of filing return. Therefore, there can be no generic rule as to the significance of payment of advance tax in construing the intention of disclosure of income. The same depends on the facts of the case, and hinges on the positioning of the search operations qua the due date for filing returns.

Thus, according to the Supreme Court, the question that whether payment of advance by an assessee per se is tantamount to disclosure of total income, for the relevant assessment year, at the very outset had to be answered in the negative. On further scrutiny, according to the Supreme Court there was yet another reason to opine so. Payment of advance tax and filing of return are functions of completely different notions of income i.e. estimated income and total income respectively. The payment of advance tax is based on an estimation of the total income that is chargeable to tax and not on the total income itself. According to section 209(1)(a), the assessee shall first estimate his “current income” and thereafter pay income tax calculated on this estimated income on the rates in force in the relevant financial year. This income is an estimation that is made by the assessee and may not be the exact income, which may ultimately be declared u/s. 139 and assessed u/s. 143. The payment of advance tax does not absolve an assessee from obligation to file return disclosing total income u/s. 139. Hence, the ‘disclosure of income’ is the disclosure of the total income in a valid return u/ s. 139, subject to assessment and chargeable to tax under the provisions of the Act.

The Supreme Court noted that in the instant case, after the search was conducted on 23rd February 1996, it was found that for the assessment year 1995-96, the assessee had not filed its return of income by the due date. It was only when the block proceedings were initiated by the Assessing Officer, that the assessee filed its return for the said assessment year on 11th July, 1996 u/s. 158BC showing its total income at Rs. 7,02,768. The Supreme Court held that since the assessee had not filed its return of income by the due date, the Assessing Officer was correct in assuming that the assessee would not have disclosed its total income.

Note 1: During the course of hearing, the counsel for the assessee relying upon the decision in Asst. CIT vs. Hotel Blue Moon (2010) 321 ITR 362 (SC) for the first time contended that the Revenue did not have jurisdiction to invoke Chapter XIV-B against the assessee as the Assessing Officer had not recorded his satisfaction that any undisclosed income belonged to the assessee or that the assessee did not have the intention to disclose their income before initiating proceeding u/s. 158BD. The Supreme Court however was unable to appreciate the submission since the same was never urged before the High Court and the Tribunal and refrained from making any observations on it.

Note 2: In CIT vs. Nachammai [C.A. No.2580 of 2010], a companion appeal, the issue was whether tax deduction at source amounts to disclosure of income. The Supreme Court held that since the tax to be deducted at source is also computed on the estimated income of an assessee for the relevant financial year, such deduction cannot result in the disclosure of total income.

Export — Deduction u/s.80HHC — Only ninety percent of the net amount of any receipt of the nature mentioned in clause (1), which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining ‘profits of the business’ of the assessee under Explanation (baa) to section 80HHC.

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[ACG Associated Capsules P. Ltd. v. CIT, (2012) 343 ITR 89 (SC)]

For the A.Y. 2003-04, the assessee filed a return of income claiming a deduction of Rs.34,44,24,827 u/s.80HHC of the Act. The Assessing Officer passed the assessment order deducting 90% of the gross interest and gross rent received from the profits of business while computing the deduction u/s.80HHC and accordingly restricted the deduction u/s.80HHC to Rs.2,36,25,053. The assessee filed an appeal against the assessment order before the Commissioner of Income-tax (Appeals), who confirmed the order of the Assessing Officer excluding 90% of the gross interest and gross rent received by the assessee while computing the profits of the business for the purposes of section 80HHC. Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short ‘the Tribunal’). The Tribunal held, relying on the decision of the Delhi High Court in CIT v. Shri Ram Honda Power Equip, (2007) 289 ITR 475 (Delhi), that netting of the interest could be allowed if the assessee is able to prove the nexus between the interest expenditure and interest income and remanded the matter to the file of the Assessing Officer. The Tribunal also remanded the issue of netting of the rent to the Assessing Officer with the direction to find out whether the assessee has paid the rent on the same flats against which rent has been received from the staff and if such rent was paid, then such rent is to be reduced from the rental income for the purpose of exclusion of business income for computing the deduction u/s.80HHC. Against the order of the Tribunal, the Revenue filed an appeal before the High Court and the High Court has directed that on remand the Assessing Officer will decide the issue in accordance with the judgment of the High Court in CIT v. Asian Star Co. Ltd., (2010) 326 ITR 56 (Bom.) in which it has been held that while determining the profits of the business as defined in Explanation (baa) to section 80HHC, 90% of the gross receipts towards interest and not 90% of the net receipts towards interest on fixed deposits in banks received by the assessee would be excluded for the purpose of working out the deduction u/s.80HHC of the Act.

Against the order of the High Court, the assessee filed a Special Leave Petition before the Supreme Court wherein leave was granted. The Supreme Court observed that Explanation (baa) states that ‘profits of the business’ means the profits of the business as computed under the head ‘profits and gains of business or profession’ as reduced by the receipts of the nature mentioned in clauses (1) and (2) of Explanation (baa). Thus, profits of the business of an assessee will have to be first computed under the heads ‘profits and gains of business or profession’ in accordance with the provisions of sections 28 to 44D of the Act. In the computation of such profits of business, all receipts of income which are chargeable as profits and gains of business u/s.28 of the Act will have to be included. Similarly, in computation of such profits of business, different expenses which are allowable u/s.30 to u/s.44D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the assessee computed under the head ‘profits and gains of business or profession’ from which deductions are to made under clauses (1) and (2) of Explanation (baa).

Under clause (1) of Explanation (baa), 90% of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head ‘profits and gains of business or profession’. The expression ‘included any such profits’ in clause (1) of Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt, which are included in profits of the business as computed under the head ‘profits and gains of business or profession’.

The Supreme Court therefore held that only 90% of the net amount of any receipt of the nature mentioned in clause (1), which is actually included in the profits of the assessee is to be deducted form the profits of the assessee for determining ‘profits of the business’ of the assessee under Explanation (baa) to section 80HHC. For this interpretation of Explanation (baa) to section 80HHC of the Act, the Supreme Court relied on its judgment of the Constitution Bench in Distributors (Baroda) P. Ltd. v. Union of India, (1985) 155 ITR 120 (SC).

Since the High Court had set aside the order of the Tribunal and directed the Assessing Officer to dispose the issue in accordance with the judgment of the Bombay High Court in CIT v. Asian Star Co. Ltd., (2010) 326 ITR 56 (Bom.), it examined the reasons given by the High Court in its judgment and noted the fallacies therein.

In the result, the Supreme Court allowed the appeal and set aside the impugned order of the High Court and remanded the matter to the Assessing Officer to work out the deductions from rent and interest in accordance with this judgment.

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Interest u/s. 234B and 234C—Credit for minimum alternate tax has to be set off from the tax payable before levy of interest u/s. 234B and 234C of the Act.

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CIT vs. Sage Metals Ltd. (2013) 354 ITR 675 (SC)

In a group of appeals filed by the Revenue before the Delhi High Court a common issue was involved, namely, whether interest u/s. 234B and 234C is to be charged before the tax credit (commonly referred to as MAT credit) available u/s. 115 JAA is set off against tax payable on total income or after it is set off? And additional issue was whether this question was debatable and therefore, the provisions of section 154 could not have been invoked.

The High Court dismissing the appeals of the Revenue held that interest u/s. 234B and 234C is to be charged after the tax credit (MAT credit) available u/s. 115JAA is set off against tax payment on total income of the year in question. The High Court further held that the decision of Benches of the Tribunal at Chandigarh and Chennai did indicate that the Tribunal was correct in law in holding that rectification could not be made by the Assessing Officer u/s. 154 of the Act as the issue regarding charging of interest u/s. 234B of the Act without giving set off of the MAT credit available to the assessee was highly debatable.

On a Special Leave Petition being filed before the Revenue before the Supreme Court, the Court noted that a short question which arose for its determination in the appeals before it was, whether the Department was entitled to charge interest u/s. 234B of the Act on the assessee bringing forward the tax credit balance into the year of account relevant to the assessment year 2001-02. According to the Supreme Court this question has been answered in favour of the assessee by its judgment in the case of CIT vs. Tulsyan NEC Ltd., (2011) 330 ITR 226 (SC). Consequently, the Supreme Court dismissed the appeals filed by the Department.

Note: Sections 234A/234B/234C have been amended to provide such set-off by the Finance Act, 2006 w.e.f. Asst.Year 2007-08.

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Investment Allowance – Whenever the assessee claims investment allowance u/s. 32A of the Act, it has to lead evidence to show that the process undertaken by it constitutes “production”.

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Vijay Granites Pvt. Ltd. v. CIT (2012) 349 ITR 350(SC)

The assessee, a company engaged in the business of raising granites from mines, polishing them and exporting them outside India as also in purchasing granite blocks and after subjecting granite blocks to further processing, exporting them outside India, claimed investment allowance in respect of cranes for assessment year 1986-87 and 1987-88 and allowance u/s. 32A for the assessment year 1988-89.

The Assessing Officer disallowed the claim, firstly on the ground that cranes were transport vehicles and further on the ground that no manufacturing process was involved in cutting the granites and polishing them. On appeal, the appellate authority accepted the contention of the assessee to the effect that the machinery was not a transport vehicle and the assessee was engaged in the manufacture or production of articles and therefore entitled to deduction. On appeal by the Department, the Tribunal confirmed the aforesaid conclusion. On the basis of application filed u/s. 256(1) the Tribunal referred the questions of law to the High Court. The High Court held that the act of cutting and polishing granite slabs before exporting them, did not involve any process of manufacture or production and the assessee was not entitled to the deduction u/s. 32A.

On appeal by the assessee to the Supreme Court, the Supreme Court found that the assessee had not led evidence before the Assessing Officer as to the exact nature of activities undertaken by it in the course of mining, polishing and export of granites. The Supreme Court observed that it has repeatedly held that, whenever the assessee claims investment allowance u/s. 32A, it has to lead evidence to show that the process undertaken by it constistutes “production”. The Supreme Court remitted the case to the Assessing Officer for fresh determination within three months from the date of receipt of the record, after giving opportunity to the assessee to produce relevant evidence.

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Rectification of mistakes – Issue involving moot question of law at the relevant time – Rectification not permissible.

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Dinosaur Steels Ltd. v. Jt. CIT (2012) 349 ITR 360 (SC)

The assessee, an industrial undertaking engaged in the manufacturing of steel products, filed its return of income for assessment year 1999-98 disclosing an income of Rs.3,31,188 as under:

Gross Total Income                        Rs. 34,92,097
Less: Deduction u/s. 80IA @ 30% Rs. 10,47,629
                                                 ————————            
                                                      Rs. 24,44,468

Less: Brought forward losses
   of earlier assessment year             Rs. 21,13,280
                                                 ————————-
Total Income                                   Rs. 3,31,188
                                                    ============
The return was processed u/s. 143(1)(a).

Subsequently, the Assessing Officer issued a notice u/s. 154 of the Act, calling for objections on the ground that there was a mistake in the assessment order, namely, the claim of deduction u/s. 80-IA had been allowed inadvertently before setting off the earlier years’ losses from the profits and gains of the industrial undertaking. The assessee objected to the proposal of restricting its claim u/s. 80-IA, by placing reliance on the judgment of the Madhya Pradesh High Court in the case of CIT v. K. N. Oil Industries reported in [1997] 226 ITR 547 (MP), in which the High Court held that losses of earlier years were not deductible from the total income for purposes of computation of special deduction u/s. 80HH and 80-I (predecessors of section 80-I). Further, according to the assessee, in any event, section 154 of the Act was not applicable as there was no patent error in the order passed by the Department u/s. 143(1)(a). In this connection, reliance was placed by the assessee on the judgment of this case of T.S. Balaram, ITO v. Volkart Brothers reported in (1971) 82 ITR 50 (SC). These contentions were rejected by the Assessing Officer. Aggrieved by the order passed by the Assessing Officer u/s. 154, the assessee filed an appeal to the Commissioner of Incometax (Appeals). The Commissioner of Income-tax (Appeals) dismissed the appeal by following the judgment of the Supreme Court in the case of CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. reported in (1997) 224 ITR 604(SC). Aggrieved by the said order, the assessee filed an appeal to the Income-tax Appellate Tribunal which was also dismissed, saying that deduction u/s. 80-IA can be allowed only after setting off the carry forward losses of the earlier years in accordance with section 72 of the Act, particularly when the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year was only from the industrial undertaking. According to the Tribunal, this was the law which was well settled by the judgment of the Supreme Court in the case of Kotagiri Industrial Co-operative Tea Factory Ltd. (supra). Therefore, according to the Tribunal, there was a patent mistake in the assessment order passed u/s. 143(1)(a) and consequently the Assessing Officer was right in invoking section 154 of the Act. This decision of the Tribunal has been upheld by the Court.

On an appeal by the assessee to the Supreme Court, the Supreme Court observed that the provisions of Chapter VI-A, particularly those dealing with quantification of deduction have been amended at least eleven times. Moreover, even section 80-IA, was earlier preceded by section 80HH and 80-I, which resulted in a plethora of cases. The Supreme Court noted that some of the amendments have been enacted even after the judgment of the Supreme Court in the case of Kotagiri Industrial Co-operative Tea Factory Ltd. (supra) delivered on 5th March, 1997. In the circumstances, the Supreme Court was of the view that one cannot say that this was a case of a patent mistake. The assessee had followed the judgment of the Madhya Pradesh High Court in K.N. Oil Industries (supra). Hence, the assessee was right in submitting that the issue involved a moot question of law, particularly at the relevant time (assessment year 1997-98).

For the above reasons, the Supreme Court held that section 154 of the Act was not applicable.

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Bad Debt – Prior to 1-4-1989 – Allowable as deduction even in cases in which the assessee(s) made only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor.

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Kerala State Industrial Development Corporation v. CIT (2012) 349 ITR 365 (SC)

The assessee, the Kerala State Industrial Development Corporation Ltd., a limited company wholly owned by the Government of Kerala, had advanced large amounts to Vanchinad Leather Ltd., a joint sector company promoted by the assessee in the year 1974 for processing hides and skins. The company started commercial production in 1977. However, it was closed down in 1980. Later it was reopened in September, 1982 and again closed down in January, 1983.

During the assessment year 1988-89, the assessee claimed deduction of Rs.55,70,949 as a provision for bad debts as in February, 1988 a declaration was made by BIFR that Vanchinad Leather Ltd. had become a sick company. The claim was disallowed on the ground that no reasonable steps had been taken for recovery of the debts and further, no part of the outstanding amount had been assessed as the income of earlier years. Also, the amount was not written off in the assessee’s accounts in claiming bad debts. The Commissioner of Income Tax (Appeals) confirmed the disallowance. The Tribunal dismissed the appeal, taking the view that the assessee could not prove that the debt had become irrevocable during the previous year and that the condition for claiming deduction u/s. 36(2)(i)(b) were not satisfied.

The following question of law was referred to the High Court u/s. 256(1) of the Act:
“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the claim of bad debts in respect of Vanchinad Leather Ltd. was not legally sustainable and allowable?”

The High Court answered the question in favour of the revenue and against the assessee, holding that in the profit and loss account the assessee had made only a provision for bad and doubtful debt and the debt had not been written off as bad debts.

On an appeal to the Supreme Court by the assessee, the Supreme Court noted that till the end, the company could not be revived and it had been wound up. In the circumstances, applying the commercial test and business exigency test, the Supreme Court held that both the conditions u/s. 36(1)(vii) read with section 36(2)(i)(b) of the Act were satisfied observing that in Southern Technologies Ltd. v. CIT (320 ITR 577) it had held that prior to 1-4-1989 even in cases in which the assessee(s) made only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled to deduction u/s. 36(1) (vii). According to the Supreme Court, there was no reason to deny to the assessee the claim for deduction of bad debt.

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Receipt — Whether sales tax incentive is a capital receipt is a substantial question of law which ought to have been considered by the High Court.

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The assessee-company derived income from the manufacture of yarn, synthetic fabrics, etc. In the earlier assessment year, it had also commenced manufacture of polyester staple fibre in its unit in Patalganga. In the return of income filed by the assessee for the A.Y. 1986-87 in computing the total income a sum of Rs.14,70,40,220 was reduced from the net profit of Rs.71,33,74,748 being subsidy (notional sales tax liability) in the nature of capital receipt. According to the assessee, to encourage setting of new industrial units in backward areas of Maharashtra, the State Government instead of giving cash subsidy, allowed the assessee to retain sales tax payable to the State Government. The Assessing Officer disallowed the claim for the reasons given in the assessment order and first Appellate order for A.Y. 1984-85, in which it was held that the assessee had already got remission by way of exemption of sales tax and there was no ground for taking notional sales tax liability as notional receipt. On appeal, the Commissioner (Appeals) following his earlier order rejected the ground of appeal on the above issue. The Tribunal referred the matter to the Special Bench, since the Tribunal in the earlier orders in the assessee’s own case for the A.Ys. 1984-85 and 1985-86 had held that the sales tax incentive was a capital receipt, but thereafter after considering the above judgments, the Bombay Bench of the Tribunal, in the case of Bajaj Auto Ltd. (ITA Nos. 49 and 1101 of 1991, dated 31-12-2002) had rejected the assessee’s claim that the incentive was a capital receipt on various grounds. The Special Bench of the Tribunal held as under:

“The Scheme framed by the Government of Maharashtra in 1979 and formulated by its Resolution dated 5-1-1980 has been analysed in detail by the Tribunal in its order in RIL for the A.Y. 1985-86 which we have already referred to the extenso. On an analysis of the Scheme, The Tribunal has come to the conclusion that the thrust of the Scheme is that the assessee would become entitled for the sales tax incentive even before the commencement of the production, which implies that the object of the incentive is to fund a part of the cost of the setting up of the factory in the notified backward area. The Tribunal has at more than one place, stated that the thrust of the Maharashtra Scheme was the industrial development of the backward districts as well as generation of employment, thus establishing a direct nexus with the investment in fixed capital assets. It has been found that the entitlement of the industrial unit to claim eligibility for the incentive arose even while the industry was in the process of being set up. According to the Tribunal, the Scheme was oriented towards and was subservient to the investment in fixed capital assets. The sale tax incentive was envisaged only as an alternative to the cash disbursement and by its very nature was to be available only after production commenced. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area.”

On appeal, the High Court noting the above held that a finding has been recorded that the object of the subsidy was to encourage the setting up of industries in the backward area by generating employment therein. In our opinion, in answering the issue, the test as laid down by the Supreme Court in Commissioner of Income-tax v. Ponni Sugars and Chemicals Ltd., (2008) 306 ITR 392 (SC) will have to be considered. The Supreme Court has held that the test of the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect of the purpose for which the subsidy is granted. The Supreme Court further observed that in such cases, what has to be applied is the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. Form of subsidy is material. The Supreme Court then proceeded to observe as under:

“The main eligibility condition in the Scheme with which we are concerned in this case is that the incentive must be utilised for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On these aspects there is no dispute. If the object of the subsidy Scheme was to enable the assessee to run the business more profitably than the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy Scheme was to enable the assessee to set up a new unit or to expand the existing unit than the receipt of the subsidy was on capital account.”

The High Court applying the purpose test based on the findings recorded by the Special Bench observed that the object of the subsidy was to set up a new unit in a backward area to generate employment. The High Court therefore held that the subsidy was clearly on capital account.

On an appeal by the Revenue, the Supreme Court held that the High Court ought not to have dismissed the appeal without inter alia considering the following question, which did arise for consideration:

“Whether on the facts and in the circumstances of the case and in law the Hon’ble Tribunal was right in holding that sales tax incentive is a capital receipt?”

The Supreme Court allowed the civil appeals and set aside the impugned order of the High Court and remitted the matter back to the High Court to decide the question, formulated above, in accordance with the law.

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Motor Accident–Compensation on account of death–In law the presumption is that the employer at the time of payment of salary deducts income tax on the estimated income of the deceased employee from the salary and in the absence of any evidence to the contrary the salary as shown in the last pay certificate should be accepted for calculating the compensation payable to the dependent(s).

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Vimal Kanwar And Ors. vs. Kishore Dan And Ors. [2013] 354 ITR 95 (SC)

On 14th September, 1996, one Mr. Sajjan Singh Shekhawat, Assistant Engineer with the Public Works Department, was sitting on his scooter which was parked on the side of the road and was waiting for one Junior Engineer, N. Hari Babu, and another whom he had called for discussion. At that time, a driver of a Jeep No. RJ10C0833 came driving from the railway station side with high speed, recklessly and negligently and hit the scooter. Sajjan Singh along with his scooter came under the jeep and was dragged with the vehicle. Due to this accident, fatal injuries were caused to him and on reaching the hospital he expired. The scooter was also damaged completely. The wife of the deceased was aged about 24 years; the daughter was aged about 2 years and the mother was aged about 55 years at the time of death of the deceased. They jointly filed an application to the Tribunal alleging that negligent and rash driving by the driver of the jeep caused the death of Sajjan Singh and claimed compensation of Rs. 80,40,160.

The Tribunal determined the compensation to be granted in favour of the appellants at Rs. 14,93,700 jointly.

Though the High Court noticed certain mistakes in determination of the compensation it upheld the same. In determining the compensation, a notional deduction of income tax was made by the High Court from the salary of the deceased apart from the deduction of annual pension and came to the conclusion that the award passed by the Tribunal was just and proper.

Before the Supreme Court, the grievance of the appellants was as follows:

(i) No amount can be deducted towards provident fund, pension and insurance amount from the actual salary of the victim for calculating compensation.

(ii) In the absence of any evidence, the court suo motu cannot deduct any amount towards income tax from the actual salary of the victim.

(iii) On the facts of the present case, the Tribunal and the High Court should have doubled the salary by allowing 100% increase towards the future prospects, and

(iv) The Tribunal and the High Court failed to ensure payment of just and fair compensation.

The first issue therefore was “whether provident fund, pension and insurance receivable by the claimants come within the periphery of the Motor Vehicles Act to be termed as ‘pecuniary advantages’ liable for deduction”. The Supreme Court observed that the aforesaid issue fell for consideration before it in Mrs. Helen C. Rebello vs. Maharashtra State Road Transport Corporation reported [1999] 1 SCC 90. In the said case, it was held that provident fund, pension, insurance and similarly any cash, bank balance, shares, fixed deposits, etc., are all “pecuniary advantages” receivable by the heirs on account of one’s death but all these have no correlation with the amount receivable under a statue occasioned only on account of accidental death. Such an amount will not come within the periphery of the Motor Vehicles Act to be termed as “pecuniary advantage” liable for deduction.

The second issue was “whether the salary receivable by the claimant on compassionate appointment comes within the periphery of the Motor Vehicles Act to be termed as ‘pecuniary advantage’ liable for deduction”. The Supreme Court held that “Compassionate appointment” can be one of the conditions of service of an employee, if a scheme to that effect is framed by the employer. In case the employee dies in harness, i.e., while in service leaving behind the dependents, one of the dependents may request for compassionate appointment to maintain the family of the deceased employee died in harness. This cannot be stated to be an advantage receivable by the heirs on account of one’s death and has no correlation with the amount receivable under a statute occasioned on account of accidental death. Compassionate appointment may have nexus with the death of an employee while in service but it is not necessary that it should have a correlation with the accidental death. An employee dies in harness even in normal course, due to illness and to maintain the family of the deceased one of the dependents may be entitled for compassionate appointment but that cannot be termed as “pecuniary advantage” that comes under the periphery of the Motor Vehicles Act and any amount received on such appointment is not liable for deduction for determination of compensation under the Motor Vehicles Act.

The third issue was “whether the income tax is liable to be deducted for determination of compensation under the Motor Vehicles Act”. The Supreme Court observed that in the case of Sarla Verma vs. Delhi Transport Corporation (2009) 6 SCC 121, it was held that “generally the actual income of the deceased less income tax should be the starting point for calculating the compensation”. It was further observed that “where the annual income is in taxable range, the words “actual salary” should be read as “actual salary less tax”.

The Supreme Court noticed that in the present case, none of the respondents brought to the notice of the court that the income tax payable by the deceased Sajjan Singh was not deducted at source by the employer State Government. No such statement was made by Ram Avtar Parikh, an employee of the Public Works Department of the State Government who placed on record the last pay certificate and the service book of the deceased. The Tribunal or the High Court on perusal of the last pay certificate, did not notice that the income tax on the estimated income of the employee was not deducted from the salary of the employee during the said month or financial year. In the absence of such evidence, it was to be presumed that the salary paid to the deceased Sajjan Singh as per the last pay certificate was paid in accordance with law, i.e., by deducting the income tax on the estimated income of the deceased Sajjan Singh for that month or the financial year. The appellants had specifically stated that assessment year applicable in the instant case was 1997-98 and not 1996-97 as held by the High Court. They had also taken specific plea that for the assessment year 1997-98 the rate of tax on income more than Rs.40,000 and up to Rs.60,000 was 15% and not 20% as held by the High Court. The aforesaid fact was not disputed by the respondents. In view of the finding as recorded above and the provisions of the Income-tax Act, 1961, as discussed, the Supreme Court held that the High Court was wrong in deducting 20% from the salary of the deceased towards income tax for calculating the compensation. As per law, the presumption would be that the employer State Government at the time of payment of salary deducted income-tax on the estimated income of the deceased employee from the salary and in the absence of any evidence, the Supreme Court held that the salary as shown in the last pay certificate at Rs. 8,920 should be accepted which if rounded of came to Rs. 9,000 for calculating the compensation payable to the dependent(s).

The fourth issue was “whether the compensation awarded to the appellants was just and proper”. According to the Supreme Court for determination of this issue, it was required to determine the percentage of increase in income to be made towards prospects of advancement in future career and revision of pay.

According to the Supreme Court, admittedly, the date of birth of the deceased Sajjan Singh being 1st February, 1968; the submission that he would have continued in service upto 1st February, 2026, if 58 years is the age of retirement or 1st February, 2028, if 60 years is the age of retirement required to be accepted. The Supreme Court observed that he was only 28 years 7½ months old at the time of death. In normal course, he would have served the State Government minimum for about 30 years. Even if one does not take into consideration the future prospect of promotion which the deceased was otherwise entitled and the actual pay revisions taken effect from 1st January, 1996, and 1st January, 2006, it cannot be denied that the pay of the deceased would have doubled if he would have continued in the services of the State till the date of retirement. Hence, this was a fit case in which 100% increase in the future income of the deceased should have been allowed by the Tribunal and the High Court which they failed to do. The Supreme Court having regard to the facts and evidence on record, estimated the monthly income of the deceased Sajjan Singh at Rs. 9,000 x 2 = Rs. 18,000 per month. From this his personal living expenses, which should be one-third, there being three dependents, were deducted. Thereby, the ‘actual salary’ came to Rs. (18,000-6,000=12,000) per month or Rs. 12,000 x 12 = 1,44,000 per annum. As the deceased was 28½ years old at the time of death the multiplier of 17 was applied, which was appropriate to the age of the deceased. The normal compensation would then work out to be Rs. 1,44,000 x 17 = Rs. 24,48,000 to which the Supreme Court added the usual award for loss of consortium and loss of the estate by providing a conventional sum of R. 1,00,000; loss of love and affection for the daughter Rs. 2,00,000; loss of love and affection for the widow and the mother at Rs. 1,00,000 each, i.e., Rs. 2,00,000 and funeral expenses of Rs. 25,000.

Thus, according to the Supreme Court, in all a sum of Rs. 29,73,000 was a fair, just and reasonable award in the circumstances of this case. The rate of interest of 12% was allowed from the date of the petition filed before the Tribunal till payment is made.

Exports – Special deduction – Leasing right are ‘goods’ and transfer of such rights constitute ‘sale’ of merchandise / goods and the profits thereon are eligible for deduction u/s. 80HHC.

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Commissioner of Income-tax vs. Romesh Sharma [2013] 354 ITR 229 (SC).

 The High Court had dismissed the appeal of the revenue following its decision in Abdulgafar A. Nadiadwala (2004) 267 ITR 488 (Bom). 

On appeal, the Supreme Court noted that issue involved was whether leasing rights could be considered to be ‘goods’ and whether transfer of such rights would constitute ‘sale’. The Supreme Court dismissed the appeal of the revenue following its decisions in CIT vs. B. Suresh (2009) 319 ITR 149

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Chafer VI-A – Special Deduction – Duty drawbacks is not derived from industrial undertaking and thus is not eligible for deduction u/s. 80 IA.

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Commissioner of Income-tax vs. Orchev Pharma P. Ltd. [2013] 354 ITR 227 (SC)

The High Court dismissed the appeal of the revenue on the following question of law following its decision in CIT vs. India Gelatin and Chemicals Ltd. (2005) 275 ITR 284 (Guj).

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in allowing the deduction u/s. 80-IA of the Income-tax Act, 1961, by including the amount of duty drawback?”

The Supreme Court allowed the appeal of the Department in view of its decision in Liberty India vs. CIT (2009) 317 ITR 218 (SC).

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Assessment – Supreme Court dismissed the Special Leave Petition arising from the order of the High Court in view of concurrent finding of facts where the High Court had held that statements recorded during survey operation do not have any evidentiary value when the same are subsequently retracted and no addition could be made solely on the basis of such statement.

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Commissioner of Income-tax vs. S.Khader Khan Son [2013] 352 ITR 480 (SC)

A survey action was conducted u/s. 133A of the Act on 24th July, 2001, in the premises of the assessee at 90, Syed Mada Street, Shevapet Salem, and one of the partners of the firm, by name Asif Khan. In his sworn statement Asif Khan offered an additional income of Rs. 20,00,000 for the assessment year 2001-02 and Rs. 30,00,000 for the assessment year 2002-03. However, the said statement was retracted by the assessee through its letter dated 3rd August 3, 2001, stating that the partner Asif Khan, from whom a statement was recorded during the survey operation u/s. 133A, was new to the management and he could not answer the enquiries made and as such, he agreed to an ad hoc addition, which could never be achieved by the business owing to the competition and to the legislation by the Government prohibiting smoking in public places.

The assessee filed its return of income for assessment year 2001-02 on 29th October, 2001, disclosing an income of Rs. 12,640/-.

The Assessing Officer found that certain books were not produced during the course of survey action and that certain entries in the books were made subsequent to the survey action and at the time of survey action, the assessee had come forward with the admission. The Assessing Officer rejected the book, viz., “branch contractors’ agent book” produced after the survey to support the claim of manufacturing process and based on the admission made by the assessee, which according to him were directly relatable to the defects noticed during the action u/s. 133A of the Act, recomputed the assessment by his assessment order dated 30th March, 2004.

Aggrieved by the said assessment order dated 30th March, 2004 the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), who, by order dated 30th November,2006, held the issue in favour of the assessee. On appeal, at the instance of the Revenue, the Appellant Tribunal holding that there was no infirmity in the order of the Commissioner, dismissed the Revenue’s appeal.

The High Court dismissed the appeal of the revenue holding that no substantial question of law arose since the Commissioner and Tribunal had followed Circular of CBDT dated 10th March, 2003 for arriving at the conclusions that the material collected and the statement obtained u/s. 133A would not automatically bind upon the assessee.

The Supreme Court dismissed the SLP in view of concurrent findings of fact.
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Business expenditure- Amount lying credited in the Modvat account at the end of the accounting year was expenditure allowable u/s. 37 read with section 43B.

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CIT vs. Shri Ram Honda Power Equipment Ltd. [2013] 352 ITR 481 (SC)

The Delhi High Court answered the following question of law in favour of the assessee and against the department in view of its decision in CIT vs. Modipon Ltd. (2002) 303 ITR 438(Del).

“Whether the Income-tax Appellate Tribunal was right in holding that the amount lying credited in the Modvat account at the end of the accounting year is expenditure allowable u/s. 37 read with section 43B of the Income-tax Act, 1961?”

The appeal pertained to the assessment year 1995-96.

On further appeal by the revenue, the Supreme Court observed that the judgment of the Bombay High Court in CIT vs. Indo Nippon Chemicals Co. Ltd. (2000) 245 ITR 384 (Bom) squarely applied to this case and the said decision was affirmed by the Supreme Court in (2003) 261 ITR 275(SC). The Supreme Court held that since the assessee followed net method of valuation of closing stock, the authorities below were right in coming to the conclusion that Modvat credit is excise duty paid.

Note: The above decision was followed in Asst. CIT vs. Torrent Cables Ltd. (2013) 354 ITR 163(SC) which also pertained to the assessment year 1995-96.

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Substantial Question of Laws – Whether gains on forward currency contract is not to be excluded from the profits eligible for deduction u/s. 80HHC, is a substantial question of law.

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CIT vs. Mitsu Pvt. Ltd. [2013] 354 ITR 89 (SC)

In the appeal filed to the High Court the Revenue inter alia had raised following two questions.

1. Whether, on the facts of the case and in law, the Appellate Tribunal was justified in granting relief u/s. 80HHC of the Act to the assessee on the issue of gain on forward currency contract without appreciating the fact that the gain on exchange difference is nothing but speculation profit and not related to the business of the assessee?

2. Whether, on the facts of the case and in law, the Appellate Tribunal was justified in directing the Assessing Officer not to exclude this income from the profits eligible for deduction u/s. 80HHC without appreciating the fact that when the assessee enters into a forward contract, as in this case, the assessee stands to benefit by the fluctuations in foreign exchange irrespective of the fact whether the trade agreement exist or not?

The High Court held that no question of law arose in view of finding given by the Tribunal that the foreign exchange contract was entered into by the assessee only with a view to realise the amount due on sale of goods and was related to the business of the assessee.

On an appeal, the Supreme Court was of the opinion that the above question required consideration and decision by the High Court. The Supreme Court therefore without expressing any opinion on the merits of the aforesaid questions, remanded the matter to the High Court for examination.

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High Court—Matter remanded for de novo consideration as no reasons were given for dismissal of the writ petition.

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Parvez Nazir Hussein Jafri vs. CIT (2013) 354 ITR 235 (SC)

The High Court dismissed the writ petition filed by the assessee challenging the validity of the notice dated 26th July, 2010 issued u/s. 148 for reopening the assessment for the assessment year 2006-07 holding that there was no error in issuing notice u/s. 148 and noting that the income-tax return submitted by the Petitioner was processed u/s. 143(1) on 10th March, 2007.

On appeal, the Supreme Court set aside the order of the High Court and remitted the matter back to the High Court for de novo consideration in accordance with law since the High Court had not given any reasons for not setting aside the reopening of the assessment.

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Co-operative Society—Deduction u/s. 80P(2) (a)(iii)—Matter remanded to the Commissioner of Income-tax (Appeals) to determine whether the activity of obtaining sugar from the sugar cane constituted manufacture?

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Morinda Co-operative Sugar Mills Ltd. vs. CIT (2013) 354 ITR 230 (SC)

The
assessee, a co-operative sugar mill, bought sugarcane grown by its
members. It undertook a particular operation whose outcome was a final
product in the form of sugar. The question before the Supreme Court was
whether the final product (sugar) would make the assessee entitled to
claim to benefit of section 80P(2)(a)(iii) in respect of marketing of
the agricultural produce grown by its members?

According to the
Supreme Court, the crucial issue was, whether at the time of marketing
of sugar, the same could be said to have retained the character of
agricultural produce (sugarcane) grown by members of the society or did
it represent an independent commercial commodity which no longer had the
character of agricultural produce? In short, the controversy was,
whether the operation undertaken by the assessee constituted
“manufacture”?

According to the assessee, the process undertaken
was not a “manufacture”. Broadly, according to the assessee, sugar
(also called “sucrose”) is synthesised by the sugarcane plant from water
and atmospheric carbon dioxide by the method of photosynthesis.
Sugarcane, according to the assessee, is produced in the agriculture
fields. In the sugar factory, after juice is extracted from the
sugarcane, it is boiled. Microscopic crystals coalesce together to form
macroscopic crystals and molasses.

This, according to the
assessee, did not constitute “manufacture”. In this connection, reliance
was placed by the assessee on the opinion given by the technical
advisor at the request of the National Federation of Co-operative Sugar
Factories Ltd.

According to the Department, the above operation/
activity constituted “manufacture”. In this connection, the Department
placed reliance on paragraph 10 of the judgment in the case of CIT vs .
Oracle Software India Limited reported in (2010) 320 ITR 546 (SC), where
it was observed as follows (page 551):

“The term ‘manufacture’
implies a change, but every change is not a manufacture, despite the
fact that every change in an article is the result of a treatment of
labour and manipulation. However, this test of manufacture needs to be
seen in the context of the above process. If an operation/process
renders a commodity or article fit for use for which it is otherwise not
fit, the operation/process falls within the meaning of the word
‘manufacture’.”

According to the Supreme Court, the above test
had to be applied and adjudicated on a case-tocase basis. It depended on
the type of product which ultimately emerged from a given operation. In
its view, this aspect had not been examined by the courts below.

For
the above reasons, the Supreme Court remitted the case back to the
Commissioner of Income-tax (Appeals) to re-examine the matter, directing
that (i) Commissioner of Income-tax (Appeals) would give an opportunity
to the assessee to put forth the opinion of an independent expert who
shall not be from the society or federation; (ii) A copy of the written
opinion shall be given to the Department; (iii) The Department would be
free to engage its own expert who, in turn, will give his opinion; (iv)
The parties be given liberty to cross-examine the experts. The
Commissioner of Income-tax (Appeals) would thereafter decide the case
and ascertain whether the operation undertaken by the assessee is or is
not “manufacture”. The Supreme Court disposed of the civil appeals
accordingly.

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Exports—Exemption u/s. 10A—Matter remanded to the Tribunal to consider the transaction of earning of interest on foreign currency deposit in detail to determine whether there existed any nexus between interest and industrial undertaking.

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India Comnet International vs. ITO (2013) 354 ITR 673 (SC)

The assessee, a private limited company established under the Madras Export Processing Zone, a 100% export oriented unit, engaged in the business of development and export of software filed its return of income for the assessment year 2002- 03 on 31st October, 2002, admitting “nil” income after claiming exemption u/s. 10A amounting to Rs. 8,34,84,900. The assessment was completed u/s. 143(3) of the Act by adding to income, the interest on deposits amounting to Rs. 92,06,602. The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer, namely that the interest income of Rs. 92,06,602 did not qualify for exemption u/s. 10A of the Act and the same had to be assessed to tax under the head “Income from other sources”. The Tribunal following the order of the jurisdictional High Court in the case of CIT vs. Menon Impex P. Ltd. (2003) 259 ITR 403 (Mad) dismissed the appeal filed by the assessee. The High Court confirmed the order of the Tribunal holding that the interest income was earned out of the export realisation and kept in the foreign currency deposit account, as permitted by the FERA under the banking regulations and that there was no direct nexus between the interest earned and the industrial undertaking since the interest was received on deposit made in banks and it was that deposit which was the source of income.

On further appeal, the Supreme Court held that the impugned judgment of the High Court was based on the judgment of the Madras High Court in the case of CIT vs. Menon Impex P. Ltd. (supra). The Supreme Court observed that in that case, the Madras High Court examined in detail the transaction in question and found that the assessee had set up a new industrial undertaking in Kandla Free Trade Zone for manufacturing light engineering goods. The goods therein were exported during the assessment year 1985-86. In the course of business, the assessee was required to open a letter of credit. On such deposit, the assessee earned interest. Under the said circumstances, the High Court held, following the judgment in the case of CIT vs. Sterling Foods reported in [1999] 237 ITR 579 (SC), that the interest received by the assessee was on deposit made by it in the banks; that such deposit was the source of income; and that, the mere fact that the deposit was made for obtaining letter of credit which letter was, in turn, used for the purpose of business undertaking did not establish a direct nexus between the interest and industrial undertaking. According to the Supreme Court, the judgment of the Madras High Court in Menon Import P. Ltd. ( supra) was based on the examination of the transaction in detail which exercise had not been undertaken in the present case.

For the above reasons, the Supreme Court set aside the impugned judgment and remitted the case to the Income-tax Appellant Tribunal for deciding the matter afresh after examining the transaction in question, as done by the Madras High Court in the case of Menon Import P. Ltd. (supra).

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Reassessment – Reason to believe that income had escaped assessment – The subsequent reversal of the legal position by the judgment of the Supreme Court does not authorise the Department to reopen the assessment [beyond a period of four years in a case where original assessment is made u/s. 143(3)], which stood closed on the basis of law, as it stood at the relevant time.

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DCIT vs. Simplex Concrete Piles (India) Ltd. (2013) 358 ITR 129 (SC)

The Respondent-assessee was engaged in the business of civil construction works on contract basis and had claimed deduction u/s. 32A, 32AB, 80HH and 80HHB as under:

n the original orders of assessment for the said assessment years reliefs, inter-alia, u/s. 32A as claimed, were allowed in full for the assessment years up to 1989-90 and u/s. 32AB for the assessment year 1988-89 and 1989-90. The Respondent-assessee’s claim for relief u/s. 80HH and 80HHB was also allowed in the assessment order for assessment year 1984-85 but the claim for reliefs u/s. 80HHB for the assessment year 1985-86, 1987-88, 1988-99 and 1989-90 was not allowed in the assessments but the same were allowed in appeals by the appellate authority.

Later     on,     6     notices     all     dated     29th     July,     1994    were issued by the Petitioner u/s. 148 for reopening the assessments u/s. 147 for the assessment years 1984-85 to 1989-90, in view of the decision of the Apex Court in N.C. Budharaja and Co. (1993) 204 ITR 412, where the Supreme Court had held that an “article or “things” used in section 32A, 32AB and 80HH refers only to a movable asset and the words “manufacture or construction of an article” cannot be extended to construction of road,   building, dam or bridge, etc. and  Respondent-assessee was therefore not entitled to deduction u/s. 32A, 32AB or 80HH.

The     Respondent-assessee     filed     a    writ     petition     before the Calcutta High Court challenging all the six   notices     issued    u/s.     148.     The     single    bench    of     Judge of the Calcutta High Court (255 ITR 49) dismissed the    writ    petitions    holding    that    the    Assessing    Officer    had prima facie reason to believe that income had escaped assessment. On appeal, the Division Bench of the Calcutta High Court (262 ITR 605) allowed the appeal of the Respondent-assessee. The Division Bench noted that the assessee had claimed benefit u/s. 32A/32AB and section 80HH/80HHB for the relevant assessment years. The Assessing     Officer     had     allowed     the     benefit     under     those    sections, having regard to the law as it stood then governing these provisions.  But there was divergence of opinion in the decision of the various High Courts.  Those benefits would be available only to an industrial undertaking. The assessee had claimed itself to be an industrial undertaking. But this question when came to be considered by the apex court in N.C. Budharaja and Co.’s case (supra), it held that the nature of business as were carried on by Respondent-assessee was not that of an industrial undertaking. The Division Bench held that this decision was rendered in September, 1993. Therefore, admittedly, this was the information on the basis reopening was permissible u/s. 147 but subject to  proviso thereunder. Admittedly, there was no allegation that amounts now sought to be made taxable were not disclosed and therefore it could not be said that there was any omission or failure to disclose fully and truly the materials necessary for assessment. The Petitioner had proposed to reopen the assessment only on the basis of the information derived by it from the decision in N.C. Budharaja’s case and as such the question of four years embargo would not be overcome by the Petitioner.

  On appeal to the Supreme Court by the Petitioner, the Supreme Court held that there was no error in the observation made by the Division Bench of the High Court that once limitation period of 4 years provided in section 149/149(1A) expires then the question of reopening by the Department does not arise. The Supreme Court further held that in any event, at the relevant time, when the assessment order got completed, the law as declared by the jurisdictional High Court, was that the civil construction work carried out by the Respondent-assessee would be entitled to the benefit of   section 80HH which was later reversed in the case of  CIT vs. N.C. Budharaja and Co. The subsequent reversal of the legal position by the judgement of the Supreme Court does not authorise the Department to reopen the assessment, which stood closed on the basis of the law, as it stood at the relevant time. The Supreme Court dismissed civil appeals accordingly.

Appeal to High Court – Substantial Questions of Law framed for consideration by court – The High Court’s power to frame substantial question(s) of law at the time of hearing of the appeal other than the questions on which appeal has been admitted remains u/s. 260A(4) but 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 therefor

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CIT vs. Mastek Ltd. [2013] 358 ITR 252 (SC)

The appeal filed by the Revenue u/s. 260A of the Income-tax Act, 1961 (the “Act”) had been admitted by the High Court and following two substantial questions of law were framed for consideration of the appeal;

“(A) Whether the Appellate Tribunal has substantially erred in law and on facts in reversing the order passed by the Assessing Officer and thereby deleting the adjustment while computation of the arm’s length price of the international transactions of software services distributed by MUK (Associated Enterprise) by making an upward adjustment of Rs. 18,62,45,100?

(B) Whether the Appellate Tribunal has substantially erred in law and on facts in reversing the order passed by the Assessing Officer and thereby deleting the adjustment by way of human resource management services of Rs. 2,92,22,683 treating the same as an international transaction?”

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 observed that the Revenue was under some misconception. The Supreme Court noted that 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 the Supreme Court, the High Court’s power to frame substantial question(s) of law at the time of hearing of the appeal other than the questions on which appeal has been admitted remained u/s. 260A(4). This power was subject, however, to two conditions, (one) the court must be satisfied that appeal involves such questions, and (two) the court has to record reasons therefor.

In view of the above legal position, according to the Supreme Court, there was no justifiable reason to entertain the special leave petition.

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Writ – When an alternative remedy is available to the aggrieved party it must exhaust the same before approaching the writ court—order of High Court quashing the notices issued u/s. 153C as being without jurisdiction set aside by the Supreme Court.

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CIT vs. Vijaybhai N. Chandrani [2013] 357 ITR 713 (SC)

The respondent-assessee purchased a plot of land from “Samutkarsh Co-operative Housing Society” (for short “the society”) being developed by one Savvy Infrastructure Ltd. In 2008, a search was conducted u/s. 132 of the Act, 1961, in the premises of the society and also at the office of Savvy Infrastructure Ltd. During the search certain documents were seized. Upon scrutiny, it was found that the seized documents reflected names of certain individuals including the assessee. Accordingly, for further proceedings the assessing authority had transmitted the seized documents to the jurisdictional assessing authority in whose jurisdiction the assessee was being assessed. After receipt of the said information/documents, the assessing authority has recorded a satisfaction note dated 7th October 2009, that, he has reason to believe that a case of escapement of income may exist and, therefore, the assessee’s case requires to be reassessed for the assessment years 2001-02 to 2006-07 u/s. 153C of the Act, 1961.

Accordingly, the assessing authority issued six show-cause notices u/s. 153C of the Act, 1961, to the assessee for assessment of income of the aforesaid six assessment years and directed him to furnish return of income in respect of the said assessment years in the prescribed form within 30 days of the receipt of the said notices, dated 7th October 2009.

Upon receipt of the notice, the assessee by letter dated 11th November, 2009, requested the assessing authority to furnish him with the copies of the seized documents on the basis of which the said notices were issued. The assessing authority had provided the said documents to the assessee, whereafter the assessee has approached the High Court in a writ petition questioning the six showcause notices dated 7th October, 2009.

The High Court elaborately examined the case at hand and delved into the statutory scheme for assessment in the case of search and requisition as prescribed u/s. 153A, 153B and 153C of the Act, 1961, and reached the conclusion that the documents seized by the assessing authority did not belong to the assessee and, therefore, the condition precedent for issuance of the notice u/s. 153C was not fulfilled. Accordingly, the High Court allowed the writ petition filed by the assessee and quashed the said notices issued by the assessing authority.

Aggrieved by the aforesaid judgement and order passed by the High Court, the assessing authority was before the Supreme Court.

The Supreme Court observed that the jurisdictional assessing authority, upon having a reason to believe that the documents seized indicated escapement of income, had issued show-case notices u/s. 153C to the assessee for reassessment of his income during the assessment years 2001-02 to 2006-07. Thereafter, upon request of the assessee, the assessing authority had furnished him with the copies of documents seized. The assessee being dissatisfied with the said documents instead of filing his explanation/reply to the show-cause notices, had filed a writ petition before the High Court.

According to the Supreme Court, at the said stage of issuance of the notices u/s. 153C, the assessee could have addressed his grievances and explained his stand to the assessing authority by filing an appropriate reply to the said notices instead of filing the writ petition impugning the said notices. The Supreme Court remarked that it is settled law that when an alternative remedy is available to the aggrieved party, it must exhaust the same before approaching the writ court.

The Supreme Court held that in the present case, the assessee had invoked the writ jurisdiction of the High Court at the first instance without first exhausting the alternative remedies provided under the Act. According to the Supreme Court, at the said stage of proceedings, the High Court ought not have entertained the writ petition and instead should have directed the assessee to file reply to the said notices and upon receipt of a decision from the assessing authority, if for any reason it is aggrieved by the said decision, to question the same before the forum provided under the Act.

In view of the above, without expressing any opinion on the correctness or otherwise of the construction that was placed by the High Court on section 153C, the Supreme Court set aside the impugned judgement and order of the High Court. Further, the Supreme Court granted time to the assessee, if it so desired, to file reply/objections, if any, as contemplated in the said notices within 15 days time from the date of order. If such reply/ objections were filed within time granted by this court, the assessing authority would first consider the said reply/objections and thereafter direct the assessee to file the return for the assessment years in question. The Supreme Court clarified that while framing the assessment order, the assessing authority would not be influenced by any observations made by the High Court while disposing of the writ petition and if, for any reason, the assessment order went against the assessee, he/it would avail of and exhaust the remedies available to him/it under the Income-tax Act, 1961.

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Industrial Undertaking – Deduction u/s. 80IA – Texturing and twisting of polyester yarn amounts to manufacture.

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CIT vs. Yashasvi Yarn Ltd. (2013) 350 ITR 208 (SC).

A short question that arose for determination before the Supreme Court was whether texturing and twisting of polyester yarn amounts to “manufacture” for the purpose of computation of deduction u/s. 80IA.

The High Court had dismissed the appeals of the Revenue following its decision in CIT vs. Emptee Poly-Yarn Pvt. Ltd. (2008) 305 ITR 309 (Bom).

The Supreme Court dismissed the civil appeals of the Revenue holding that the question had been squarely answered by it in CIT vs. Emptee Poly-Yarn P. Ltd. (2010) 320 ITR 665 (SC).

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Exports – Profits on telecasting rights of a T.V. Serial are entitled to the benefit of section 80HHC

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CIT vs. Faquir Chand (HUF) (2013) 350 ITR 207 (SC)

The question that arose before the Supreme Court was whether the profit on telecasting rights of a T.V. serial are entitled to the benefit of section 80HHC.

The High Court had dismissed the appeal of the Revenue in view of its judgment in Abdul Gafar A. Nadialwala v. ACIT (2004) 267 ITR 488 (Bom).

The Supreme Court dismissed the civil appeal of the Revenue holding that the issued was squarely covered in favour of the assessee by its decision in CIT vs. B. Suresh (2009) 313 ITR 149(SC).

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Business Expenditure – Interest on borrowed capital by an assessee carrying on manufacture of ferro-alloys and setting up a sugar plant – where there is unity of control and management in respect of both the plants and where there is intermingling of funds and dovetailing of business the interest could not be disallowed on the ground that the assessee had not commenced its business.

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CIT vs. Monnet Industries Ltd. (2012) 350 ITR 304 (SC)

In 1991, the assessee had set up a ferro-alloys manufacturing plant in Raipur, which was engaged in both the manufacture of ferro-alloys, as also, trading of ferro alloys.

In the years 1994-95 and 1995-96, the assessee set up a sugar manufacturing plant at Muzaffanagar in the state of UP. The sugar plant had an installed capacity 2500 RD. The assessee’s trial in respect of sugar plant commenced on 20-03-1996. The assesee spent a sum of Rs. 5,66,79,270/- as pre-operative expenses in respect of the sugar plant which inter alia included financial charges of Rs.3,50,83,472/-.

In its return of income for the assessment year 1996-97, the assessee declared loss of Rs.7,23,18,949/- in which the assessee, inter alia, had claimed the aforesaid sum of Rs. 5,66,79,270/- as revenue expenditure.

The Assessing Officer disallowed the expenditure for the reason that the sugar plant constituted new source of income as it was not the same business in which the assessee was engaged.

The Commissioner of Income-tax (Appeals) came to the conclusion that the expenditure in issue was in the nature of revenue expenditure since the sugar plant project was in the same business fold.

The Tribunal allowed deduction of only that expenditure which was incurred towards finance charges, being a sum of Rs. 3,50,83,472/- incurred for setting up of sugar plant as revenue expenditure u/s. 36(1)(iii). In respect of the balance amount in the sum of Rs. 2,15,95,798/-, the Tribunal restored the matter back to the Assessing Officer to ascertain whether the expenditure was of capital or revenue nature.

On an appeal to the High Court by the Revenue, the High Court observed that the Tribunal had given the finding that there was unity of control and management in respect of the ferro alloys plant as well as the sugar plant and there was also intermingling of funds and dovetailing of business. The High Court held that in the circumstance, it could not be said that the assessee had not commenced its business and hence, interest would have to be capitalised. The High Court confirmed the order of the Tribunal.

The Supreme Court dismissed the civil appeal filed by the Revenue in view of the concurrent finding recorded by court below.

Note: W.e.f. 01.04.2004, the Finance Act, 2003 inserted proviso to section 36(i)(iii) which effectively, prohibits the deduction under this section in respect of interest on capital borrowed for acquisition of an asset for extension of existing business for the period up to the date on which such asset is first put to use.

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Income – In determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt – Amounts collected from customers towards disputed Sales Tax liability were not kept in a separate bank account and hence formed part of business turnover and thus constituted income.

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Sundaram Finance Ltd. v. ACIT [2012] 349 ITR 356 (SC)

The assessee, a non-banking financial company, was engaged in the business of the hire purchase financing, equipment leasing and allied activities.

The assessee had filed its return of income for the assessment year 1998-99 for a total income of Rs.50,38,16,950.

The assessee had been collecting certain sums as “contingent deposit” from the leasing/hire purchase customers with a view to protect themselves from sales tax liability. These amounts were collected on ad hoc basis.The assessee did not offer such sums to tax as income on the ground that such sums were collected as contingent deposits.

The case of the assessee before the Supreme Court was that the said collection was in anticipation of sales tax liability, which was disputed. According to the assessee, in order to safeguard itself against, inter alia, the said sales tax liabilities, the assessee received Rs.36,47,585 as contingent deposits from its customers which were “refundable”, if the assessee was to succeed in its challenge to the levy of the said sales tax. According to the assessee, the sum of Rs.36,47,585 was, therefore, an imprest with a liability to refund, that the said sum had the character of “deposits” and hence, were not taxable in the year of receipt, but would be taxable only in the year in which the liability to refund the sales tax ceased [in case the assessee failed in the pending sales tax appeals).

The Supreme Court observed that it is well settled that in determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt. The taxing authorities are bound to determine the true legal character of the transaction. In the present case, the assessee had received Rs.36,47,585 in the assessment year 1998-99. As per the statement made by learned counsel for the assessee in court, the said sum of Rs.36,47,585 was not kept in a separate interest bearing bank account but it formed part of the business turnover. In view of the said statement, the Supreme Court was of the view that there was no reason to interfere with the impugned judgment of the High Court. Applying the substance over form test, the Supreme Court was satisfied that in the present case the said sum of Rs.36,47,585 constituted income. The said amount was collected from the customers. The said amount was collected towards sales tax liability. The said amount formed part of the turnover.

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Method of Accounting – Valuation of Stock – Manufacturer of sugar – the closing stock of incentive sugar to be valued at levy price which was less than the cost

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CIT vs. Bannari Amman Sugars Ltd. [2012] 349 ITR 708 (SC)

The assessee is a company engaged in the business of manufacture and sale of sugar. The assessee filed its return of income for the assessment year 1997-98. In its return of income, confined to its Karnataka unit, the assessee valued the closing stock of incentive sugar (free sugar) at levy price. The Assessing Officer valued the closing stock of incentive sugar at cost, whereas the assessee claimed that the said stock should be valued at levy price which has less than the cost.

The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee. The Tribunal and the High Court dismissed the appeal of the Revenue. According to the Supreme Court, to answer that above controversy, the following facts are required to be noted. By virtue of the provisions of the Essential Commodities Act, 1955, and the Sugar Control Order read with the Notification issued thereunder, a sugar manufacturer (assessee in this case) was required to sell 40 % of his sugar production at the notified levy price to the public distribution system. At the relevant time, on an average, the levy price came to be less than the manufacturers’ cost of production. Consequently, it was found by the manufacturers that under the above price control regime, the establishment of new sugar manufacturing units was not viable. It was found that even the existing sugar manufacturing units had become unviable and uneconomical. Therefore, an incentive scheme was framed, as suggested by the Sampat Committee, the committee that was set up to examine the economic viability by establishing new sugar factories and expanding the existing factories. The Sampat Committee gave its report. Under the report, an incentive scheme was evolved. The said incentive scheme provided an inducement for persons to set up new sugar factories or to expand the existing one. Under the scheme, 40 % of the total sugar production was permitted to be sold at market price (“incentive sugar” for short). However, the scheme provided that excess amount realised by the manufacturer over the levy price by sale of incentive sugar would be utilised only for repayment of loans taken from the banks/financial institutions for establishing the new units. In regard to utilisation of excess realisation towards repayment of loans, the sugar mills were directed to file certificate of chartered accountant subject to which further release orders would be issued by the Directorate of Sugar. This scheme came up for consideration before the Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) in which it was held that the excess amount realised by the manufacturer over the levy price by sale of incentive sugar should be treated as a capital receipt which was not taxable under the Income-Tax Act, 1961. In that case, one of the arguments advanced on behalf of the Department, as in this case, was that the excess amount realised by the manufacturer over the levy price should be treated as a revenue receipt.

The Supreme Court observed that there are different methods of valuation of closing stock. The popular system is cost or market, whichever is lower. However, adjustments may have to be made in the principle having regard to the special character of assets, the nature of the business, the appropriate allowances permitted, etc., to arrive at taxable profits. The Supreme Court noted that in the present case, it was the case of the assessee, that following the judgment in Ponni Sugar and Chemicals Ltd. (supra), the closing stock of incentive sugar should be allowed to be valued at levy price, which on facts is found to be less than the cost of manufacture of sugar (cost price). According to the Supreme Court, there was merit in this contention. In Ponni Sugars and Chemicals Ltd. (supra), on examination of the scheme, it was held that, the excess realisation was a capital receipt, not liable to be taxed and in view of the said judgment, the Supreme Court held that the assessee was right in valuing the closing stock at levy price.

The Supreme Court dismissed the civil appeals filed by the Department.

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Business Expenditure – Scheduled Commercial Banks – Bad and doubtful debts – Entitled to deduction of irrecoverable debts written off u/s. 36(1)(vii) in addition to the deduction of provision for bad and doubtful debts u/s. 36(1)(viia).

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Dy. CIT (Assessment) & Anr. vs. Karnataka Bank Ltd. [2012] 349 ITR 705 (SC)

The Assessing Officer noticed that for the relevant assessment year, while the assessee had claimed a deduction of a sum of Rs.3,36,78,394 under clause (vii) of s/s. (1) of section 36, the assessee had also claimed a deduction in terms of section 36(1)(viia) to the extent of Rs.5,75,00,000 and therefore, being of the opinion that the deduction claimed u/s. 36(1)(vii) being less than the amount claimed u/s. 36(1)(viia) disallowed the entire amount of deduction claimed u/s. 36(1)(vii). It was this dispute which had been carried to the first appellate authority by the assessee which was not successful but in the appeal before the Appellate Tribunal, the Tribunal purporting to follow its decision in the case of the very assessee for the assessment years 1990-91 to 1993-94 and having allowed the assessee’s appeals for the relevant assessment year thought it fit to allow the appeal for the year relevant to the subject-matter of the appeal.

The High Court while examining the very questions in the case of the very assessee and for the years 1993-94 and 1994-95, had answered similar questions in favour of the assessee and against the Revenue and dismissed the appeals as per the judgment dated 19th March, 2008 [Deputy CIT vs. Karnataka Bank Ltd. [2009] 316 ITR 345 (Karn)].

The Supreme Court held that the issue involved in these cases was covered in favour of the assessee, vide its judgment in the case of Catholic Syrian Bank Ltd. v. CIT reported in (2012) 343 ITR 270.

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Small Scale Industrial Undertaking – Reference not to be made to the Eleventh Schedule for the purposes of consideration of the claim u/s. 80-IB. Manufacture – Process of blending of Extra Neutral Alcohol (ENA) to make various products like whiskey, brandy, rum, etc. is a manufacturing activity.

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CIT vs. Vinbros And Co. [2012] 349 ITR 697 (SC)

The assessee, a small–scale industry recognised as such by the Director of Industries, Pondichery, set up a second unit to manufacture and bottle Indian manufactured foreign liquor (IMFL) at Pondichery. In its return for the assessment years 2003-04 and 2004-05, it claimed deduction u/s. 80-IB of the Act in respect of the profits and gains derived from the second unit. The Assessing Officer, however, rejected the plea on the issue that the process carried on by the assessee for its product, did not constitute ‘manufacture’ within the meaning of section 80-IB. He further held that setting up of the second unit was only an expansion or reconstruction of the existing unit. Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

In the proceedings before the Commissioner of Income Tax (Appeals), the assessee explained the process of blending as follows:

The assessee purchased rectified spirit or extra neutral alcohol (ENA) made of grain or grapes or malt to which it added demineralised water in required proportion to reduce the strength of the ENA to make various products like whiskey, brandy, rum, etc. Apart from that, other ingredients like caramel, sugar, etc., were also added as per the blending formulations. This blend was subject to filtration for required time, blend inspection and then bottling in empty bottles. The finished products were packed and sold.

The Commissioner of Income Tax (Appeals) considered the fact that the alcoholic strength of ENA which was around 95 % v/v was reduced to a maximum of 42.8 % v/v. Consequently, the Commis- sioner of Income Tax (Appeals) held that there was no manufacture or production of any new article or thing as the alcohol which was the input remained as alcohol. In the circumstances, he rejected plea for deduction u/s. 80-IB of the Act.

On further appeal before the Tribunal, the assessee reiterated the contentions as regards the process undertaken to result in a totally different marketable commodity. Considering the entirety of the issue and applying the decision of the Allahabad High Court in the case of CIT vs. Rampur Distilleries and Chemicals Co. Ltd., reported in [2005] 277 ITR 416 (All), the Tribunal held that the rectified spirit is not mentioned in the first item of the Eleventh Schedule ‘beer, wine and other alcoholic spirits’ and, consequently, the assessee as a small-scale industrial unit was entitled to deduction u/s. 80-IB of the Act.

On appeal by the Revenue before the High Court, it was held that a perusal of section 80-IB showed that a deduction under the said provision is available only where the assessee engages in the manufacture or production of an article or thing, not being an article or thing as specified in the list in the Eleventh Schedule or operates one or more cold storage plant or plants in any part of India. The proviso to sub-clause (iii) of s/s. (2) of section 80-IB of the Act showed that the condition with reference to the list in the Eleventh Schedule did not apply at all to the case of an industry being a small scale undertaking or an undertaking referred to in s/s. (4). The industry run by the assessee was admittedly a small-scale industry, reference to the Eleventh Schedule for the purpose of consideration of the claim u/s. 80-IB of the Act did not arise.

As regards the second issue as to whether the assessee had engaged itself in the manufacturing or producing of an article or thing by the act of blending, the High Court observed that (i) the assessee did not just add water and sell the final product, apart from water, the assessee had to add several items to make it fit for human consumption; (ii) the assessee was not a manufacturer of ENA which was the basic raw material required for making various IMFL products; (iii) it was mixing water and other ingredients with ENA formulations; (iv) the alcoholic strength of the ENA which was around 95 % v/v was reduced to a maximum of 42/8 % v/v in respect of the final marketable commodity, namely, whiskey, brandy, rum, vodka and gin; (v) the blending was subject to filtration for required time and thereafter only, the final product was sold. On the face of the facts stated above, the High Court opined that it was not possible for it to accept that the blending should not be treated as a manufacturing activity u/s. 80-IB of the Act.

The Supreme Court dismissed the civil appeal filed by the Revenue holding that there was no infirmity in the impugned judgment of the high Court.

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Industrial Undertaking – Deduction u/s. 80 HH and 80-I – Neither section 80HH nor section 80-I (as it stood in assessment year 1992-93) statutorily obliged an assessee to maintain its accounts unit-wise and it was open to maintain accounts in a consolidated form from which unit-wise profits could be worked out for computing deduction u/s. 80HH/80I.

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[2012] 349 ITR 352 (SC) CIT v. Bongaigaon Refinery and Petrochemical Ltd.

Bongaigaon Refinery and Petrochemical Ltd. (for short “BRPL”) (before it merged in IOC) was a public sector undertaking engaged in refinery, petrochemical and polyester staple fibre business. Three different and separate units were set up by BRPL in the financial year 1979-80, 1985-86 and 1988-89 respectively. The three units were engaged in the production of separate and distinct types of products. They were three different industrial undertakings. BRPL was entitled to claim deduction u/s. 80HH and 80-I of the Income-tax Act, 1961, during the relevant assessment year 1992-93. BRPL could not claim such deduction till the assessment year 1992-93, as its net taxable income for earlier assessment years was nil. It was only in the assessment year 1992-93 when the gross total became positive that BRPL claimed relief for its petrochemical unit u/s. 80HH and u/s. 80-I of the Income-tax Act 1961. However, BRPL could not claim such deduction for its refinery unit, as the period for which such relief could be claimed had expired. Further, it could not claim such deduction for its polyester staple fibre unit as it had negative income during the accounting year ending 31st March, 1992, corresponding to the assessment year 1992-93.

The Assessing Officer while framing assessment had allowed the claim of deduction u/s. 80HH and 80I. Subsequently, the Commissioner of Income Tax revised the assessment u/s. 263 on the grounds that the assessee had not maintained its accounts unit-wise for claiming deduction u/s. 80HH and 80-I. On an appeal, the Tribunal held that there was no s tatutory requirement u/s. 80HH(5)/80-I(7) to maintain unit-wise accounts, but to put an end to the litigation directed the assessee to submit unit-wise accounts. The assessee went in an appeal before the High Court which set aside the direction of the Tribunal. On an appeal to the Supreme Court by the Department, the Supreme Court held that though neither section 80HH nor section 80-I (as it stood) statutorily obliged assessee to maintain its accounts unit-wise and that it was open to assessee to maintain the accounts in a consolidated form, however in order to put an end to the litigation between the Tax Department and PSU, it remitted the case to the Assessing Officer, to ascertain whether the assessee had correctly calculated its net profits for the assessment year in respect of its petrochemical units for the purposes of claiming deduction u/s. 80HH and 80-I. The Supreme Court observed that in the present case, the assessee had prepared its financial statements on consolidated basis from which it had worked out unit-wise net profits. If not done, it could be done by the Auditors even today from the Consolidated Books of Accounts. Once such working is certified by the Auditors, the net profit computation (unit-wise) could be placed before the Assessing Officer, who can find out whether such profits are properly worked out and on that basis compute deduction u/s. 80HH/80-I.

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Exemption – Trust issuing a receipt on 31st March, 2002 for the cheque of donation dated 22nd April, 2002 – No Violation of provisions of section 13 since the Trust had shown the amount as donation receivable in the Balance Sheet and the donor had not availed the exemption in accounting year 2001-02 but claimed it in 2002-03 only.

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DIT vs. Raunaq Education Foundation (2013) 350 ITR 420 (SC)

During the relevant accounting year 2002-03 of the respondent-assessee had, by way of donation, received two cheques for a sum of Rs.40 lakhs each from M/s. Apollo Tyres Ltd. One of the cheques was 22nd dated April, 2002, and yet it was given in the accounting year 2001-02, i.e., before 31st March, 2002.

In the assessment proceedings for the assessment year 2002-03, the Assessing Officer came to the conclusion that with an intention to do undue favour to M/s. Apollo Tyres Ltd., the cheque dated 22nd April, 2002, given by way of donation for a sum of Rs. 40 lakh had been accepted by the respondentassessee and receipt for the said amount was also issued before 31 March, 2002, i.e., in the accounting year 2001-02. According to the Assessing Officer, many of the trustees of the assessee-trust were related to the directors of M/s. Apollo Tyres Ltd., and as to give undue advantage under the provisions of section 80G of the Act, the cheque had been accepted before 31st March, 2002, although the cheque was dated 22nd April, 2002.

In the opinion of the Assessing Officer, this was clearly in violation of the provisions of section 13(2)(d), (h) and as such exemption u/s. 11 and 12 could not be allowed to the assessee. The assessment was made in the status of an association of persons.

The appeal which was filed against the assessment order was dismissed by the Commissioner of Income-tax (Appeals).

The second appeal filed before the Income-tax Appellate Tribunal by the respondent-assessee was however allowed. The Tribunal held that there was no violation of the provisions of sections 13(2)(b) and 13(2)(h) of the Act and the assessee-trust had not acted in improper and illegal manner.

The Tribunal noted the fact that the amount of donation, i.e., Rs. 40 lakhs received by way of a cheque dated 22nd April, 2002, was treated as donation receivable and, accordingly, accounting treatment was given to the said amount. The said amount was not included in the accounting year 2001-02 as donation but was shown separately in the balance-sheet as amount receivable by way of donation. Moreover, M/s. Apollo Tyres Ltd., had also not availed of the benefit of the said amount u/s. 80G of the Act during the accounting year 2001-02 but had availed of the benefit only in the accounting year 2002-03, the period during which the cheque had been honoured and the amount of donation was paid to the assessee-trust.The High Court dismissed the appeal to the Revenue observing that the Tribunal found that it was only a post-dated cheque and it could not be said to be an amount which was made available for the use of the drawer of the cheque and, therefore, the provisions of section 13(2)(b) of the Act did not apply.

Also, no service of the assessee was available to the drawer of cheque and, therefore, the provisions of section 13(2)(d) also did not apply.

In the civil appeal filed by the revenue the Supreme Court noted certain undisputed facts. It was not in dispute that though the assessee-trust has issued receipt when it received the cheque dated 22nd April, 2002, for Rs. 40 lakh in March 2002, it was clearly stated in its record that the amount of donation was receivable in future and, accordingly, the said amount was also shown as donation receivable in the balance-sheet prepared by the assess-trust as on March 31, 2002. It was also not in dispute that M/s. Apollo Tyres Ltd., did not avail of any advantage of the said donation during the accounting year 2001-02. Upon a perusal of the assessment order of M/s. Apollo Tyres Ltd., for the assessment year 2002-03, it was clearly revealed that the cheque dated 22nd April, 2002, was not taken into account for giving benefit under section 80G of the Act as the said amount was paid in April 2002, when the cheque was honoured.

Looking into the aforestated undisputed facts, and the view expressed by the court in the case of Ogale Glass Works Ltd. [(1954) 25 ITR 529 [(SC)], the Supreme Court was of the view that no irregularity had been committed by the assesseetrust and there was no violation of the provisions of section 13(2(b) or 13(2)(h) of the Act. The fact that most of the trustees of the assessee-trust and the directors of M/s. Apollo Tyres Ltd., were related was absolutely irrelevant. The Supreme Court therefore dismissed the appeal.

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Principle of mutuality – Interest earned on surplus funds placed by the members club with members bank not covered by mutuality principle, liable to be taxed in the hands of the club.

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CIT vs. Bangalore Club. (2013) 350 ITR 509 (SC)

The Bangalore Club (“the “assessee”), an unincorporated association of persons, (AOP), in relation to the assessment years 1990-91, 1993-94, 1994- 95, 1995-96, 1996-97, 1997-98 and 1999-2000, had sought an exemption from payment of incometax on the interest earned on the fixed deposits kept with certain banks, which were corporate members of the assessee, on the basis of the doctrine of mutuality. However, tax was paid on the interest earned on fixed deposits kept with non-member banks.

The Assessing Officer rejected the assess’s claim, holding that there was a lack of identity between the contributors and the participators to the fund, and hence, treated the amount received by it as interest as taxable business income. On appeal by the assessee, the Commissioner of Income-tax (Appeal) reversed the view taken by the Assessing Officer, and held that the doctrine of mutuality clearly applied to the assessee’s case. On appeal by the Revenue, the Income-tax Appellate Tribunal affirmed the view taken by the Commissioner of Income-tax (Appeals).

The High Court reversed the decision of the Tribunal and restored the order of the Assessing Officer holding that on the facts of this case and in the light of the legal principles it was clear to us what has been done by club is nothing but what could have been done by a customer of a bank. The principle of ‘no man can trade with himself’ is not available in respect of a nationalised bank holding a fixed deposit on behalf of its customer.

On appeal to the Supreme Court by the assessee, the Supreme Court observed that the assessee was an association of persons. The concernedbanks were all corporate members of the club. The interest earned from fixed deposits kept with non-member banks was offered for taxation and the tax due was paid. Therefore, it was required to examine the case of the assessee, in relation to the interest earned on fixed deposits with the member banks, on the touchstone of the three cumulative conditions.

The Supreme Court held that: Firstly, the arrangement lacks a complete identity between the contributors and participators. Till the stage of generation of surplus funds, the setup resembled that of the mutuality; the flow of money, to and fro, was maintained within the closed circuit formed by the banks and the club, and to the extent, nobody who was not privy to this mutuality, benefited from the arrangement. However, as soon as these funds were placed in fixed deposits with banks, the closed flow of funds between the banks and the club suffered from deflections due to exposure to commercial banking operations. During the course of their banking business, the members banks used such deposits to advance loans to their clients. Hence, in the present case, with the funds of the mutuality, member bank engaged in commercial operations with third parting outside of the mutuality, rupturing the ‘privity of mutuality’, and consequently, violating the one to one identity between the contributors and participators. Thus, in the case before it the first condition for a claim of mutuality was not satisfied.The second condition demands that to claim an exemption from tax on the principle of mutuality, treatment of the excess funds must be in furtherance of the object of the club, which was not the case here. In the instant case, the surplus funds were not used for any specific service, infrastructure, maintenance or for any other direct benefit for the member of the club. These were taken out of mutuality when the member banks placed the same at the disposal of third parties, initiating an independent contract between the bank and the clients of the bank, a third party, not privy  to the mutuality. This contract lacked the degree of proximity between the club and its members, which may in a distant and indirect way benefit the club, nonetheless, it cannot be categorised as an activity of the club in pursuit of its objectives. The second condition postulates a direct step with direct benefits to the functioning of the club. For the sake of arguments, one may draw remote connections with the most brazen commercial activities to a club’s functioning. However, such is not the design of the second condition. Therefore, it stood violated.

The facts at hand also failed to satisfy the third condition of the mutuality principle, i.e., the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. This principle required that the funds must be returned to the contributors as well as expended solely on the contributors. In the present case, the funds do return to the club. However, before that, they are expended on non-members, i.e., the clients of the bank. Banks generate revenue by paying a lower rate of interest to club-assessee, that makes deposits with them, and then loan out the deposited amounts at a higher rate of interest to third parties. This loaning out of funds of the club by banks to outsiders for commercial reasons, snaps the link of mutuality and thus, breached the third condition.

The Supreme Court further observed that there was nothing on record which showed that the banks made separate and special provisions for the funds that came from the club, or that they did not loan them out. Therefore, clearly, the club did not give, or get, the treatment a club gets from its members; the interaction between them clearly reflected one between a bank and its client.

According to the Supreme Court, in the present case, the interest accrued on the surplus deposited by the club like in the case of any other deposit made by an account holder with the bank.

The Supreme Court further observed that the assessee was already availing of the benefit of the doctrine of mutuality in respect of the surplus amount received as contributions or price for some of the facilities availed of by its members,before it was deposited with the bank. This surplus amount was not treated as income; since it was residue of the collections left behind with the club. A façade of a club cannot be constructed over commercial transactions to avoid liability to tax. Such setups cannot be permitted to claim double benefit of mutuality.

In the opinion of the Supreme Court, unlike the aforesaid surplus amount itself, which is exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee from the banks would not fall within the ambit of the mutuality principle and would, therefore, be exigible to income-tax in the hands of the assessee-club.

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Appeal to High Court – Fresh material produced before the Supreme Court – The Supreme Court remanded the matter to the High Court to consider the said material as it was of relevance.

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In an appeal against the judgement and order passed by the High Court of Punjab and Haryana at Chandigarh, the Supreme Court while issuing notice to the respondent, by its order dated 3rd February, 2012 had passed the following order:

“Issue notice as to why the matter should not be sent back to the High Court as, today, learned counsel for the petitioner has placed before us a number of documents which earlier were not placed before the High Court.”

At the time of admission, the Supreme Court was of the opinion, the documents, which the appellants had filed before it were of some relevance and those documents should be looked into by the High Court before it comes to a conclusion whether the appeal requires to be allowed or to be rejected.

Taking that view of the matter, the Supreme Court set aside the order passed by the High Court and remanded the matter back to the High Court for fresh disposal after accepting the documents that were/ may be filed by the appellants, keeping all the contentions of both the parties open.

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Advance Tax – Levy of interest u/s. 234A/234B/234C is mandatory and the interest could be levied without specific direction in the assessment order.

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Karanvir Singh Gossal vs. CIT & Anr. [2012] 349 ITR 692 (SC)

The short point that was involved in the case before the Supreme Court was whether levy of interest u/s. 234A/234B of the Income-tax Act, 1961 ( “the Act”), is mandatory or not. The Supreme Court observed that at one point of time, there was a doubt on the nature of interest payable by the assessee u/s. 234A/234B of the Act and that the controversy was finally settled by its five judge bench decision in the case of CIT vs. Anjum M.H. Ghaswala [2001] 252 ITR 1.

According to the Supreme Court, the position that emerged after the judgment in Anjum Ghaswala’s case (supra) was that if interest is leviable in a given case u/s. 234B/234C, then in such a case that levy is mandatory and compensatory in nature. The recitation by the Assessing Officer directing institution of penal proceedings was not obligatory and penal proceedings could be initiated for such default without a specific direction from the Assessing Officer.

The Supreme Court noted that in the said judgment, it had been held that in appropriate cases, the Chief Commission had an authority to waive the interest.

 The Supreme Court observed that in the present case, the assessee had placed reliance on the Circular issued by the Central Board of Direct Taxes, which had been referred to and mentioned in Anjum Ghaswala’s case (supra) and that this aspect had not been considered by the High Court in its impugned order, and it was not considered even by the Tribunal.

 For the above reasons, the Supreme Court set aside the impugned orders of the Tribunal as also of the High Court. The Supreme Court directed the Tribunal to consider whether the assessee would be entitled to waiver of interest under the Circular bearing No.400/234/95-IT(B) dated 23rd May, 1996, which had been referred to in the case of Anjum Ghaswala (supra).

[Note: Since the decision of the Punjab and Haryana High Court is not available, it is not clear as to how the reference of initiation of penalty proceedings is made in paragraph 2 above. In the context and considering the cases referred to, the reference to penalty proceedings seems inadvertent. It should instead be read as “the recitation by the Assessing Officer directing levy of interest is not obligatory and interest could be levied for such default without a specific direction from the Assessing Officer.]

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Export – Profits derived from export of granite not eligible for deduction under section 80HHC

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Tamil Nadu Minerals Ltd. vs. CIT [2012] 349 ITR 695 (SC) Manufacture –

Mining of granite from quarries and exporting them after cutting, polishing, etc. tantamounts to manufacture.

The following question of law arose from determination before the Supreme Court in Civil Appeal No.2997 of 2004.

“Whether the assessee is entitled to claim deduction to the extent of profits referred to in s/s. (IB) of section 80HHC of the Income-tax Act, 1961, derived from export of goods – in this case, granite, for the assessment year 1988-89?”

The Supreme Court answered above question against the assessee in view of its judgment in the case Gem Granites vs. CIT reported in [2004] 271 ITR 322 (SC). In Civil Appeal Nos. 7472-7473 of 2004 the following question of law arose for determination before the Supreme Court.

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee is entitled to investment allowance on the activities of the assessee, viz., mining granite from quarries and exporting them after cutting, polishing etc., which tantamount to manufacture for the purpose of section 32A of the Income-tax Act, 1961?

The Supreme Court held that this issue was squarely covered in favour of the assessee, vide its judgment in the case of CIT v. Sesa Goa Ltd. [2004] 271 ITR 331 (SC).

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Co-operative Society – Income from underwriting commission and interest on PSEB Bonds and IDBI Bonds derived by a banking concern is income from banking business and hence qualified for deduction u/s. 80P(2)(a)(i).

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CIT vs. Nawanshahar Central Co-op. Bank Ltd. (2012) 349 ITR 689 (SC)

The following two questions, arose for determination before the Supreme Court: (a) Whether the High Court was justified in holding that the respondent-assessee was entitled for deduction u/s. 80P(2)

(a)(i) of the Income-tax Act, 1961, in respect of income from underwriting commission and interest on PSEB Bonds and IDBI Bonds?

 (b) Whether the High Court was justified in affirming the decision of the Tribunal that the income earned by the assessee which was derived from underwriting the issue of bonds and investments in PSEB Bonds was in the nature of income from banking business and hence qualified for deduction u/s. 80P(2)(a)(i) of the Income Tax Act, 1961 ?

The Supreme Court dismissed the appeals filed by the Department in view of its decision in CIT vs. Nawanshahar Central Co-op. Bank Ltd. (2007) 289 ITR 6 (SC).

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Business Expenditure – Interest paid in respect of borrowings for acquisition of capital assets not put to use in the concerned financial year is allowable as a deduction u/s. 36(1)(iii).

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Vardhman Polytex Ltd. vs. CIT (2012) 349 ITR 690 (SC)

The assessee, who was engaged in the business of yarn, filed its return of income for the assessment year 1992-93 declaring its taxable income at Rs. 3,59,86,359/-. A revised return thereafter was filed declaring taxable income of Rs. 3,48,09,071/-. In the computation of income filed alongwith the revised return, the assessee claimed additional deduction amount of Rs. 1,97,290/- and Rs. 9,80,000/- on account of interest u/s. 36(1)(iii) and up front fees respectively. The claim was made on account of loans raised for set up of a new unit at Baddi (HP). The Assessing Officer, in view of the fact, that the loan was raised for setting up a new unit for creating a capital asset which was yet to come into production, disallowed the interest, relying upon Explanation 8 to section 43(1).

The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee and the Tribunal rejecting the appeal of the Revenue approved the order passed by the Commissioner of Income Tax (Appeals).

The Full Bench of the Punjab and Hariyana High Court reversed the order of the Tribunal [CIT vs. Vardhaman Polytex Ltd. – 299 ITR 152 (P & H) (FB)] holding that the loan was not raised for the purpose of running of the business for its day to day requirements, but for the purpose of creating additional assets, new capacity at a new location and as such the interest on the loan was not deductible u/s. 36.

The Supreme Court reversed the order of the High Court following its judgement in Deputy CIT vs. Core Healthcare Ltd. reported in (2008) 298 ITR 194(SC).

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Right to information – The details disclosed by a person in his income-tax returns are “personal information” which stand exempted from disclosure under clause (j) of section 8(1) of the Right to Information Act, 2005.

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Girish Ramchandra Deshpande vs. CIC & Ors. [2013] 351 ITR 472 (SC)

The Supreme Court was concerned with the question whether the Central Information Commissioner acting under the Right to Information Act, 2005 was right in denying information regarding the third respondent’s personal matters pertaining to his service career and also denying the details of his assets and liabilities, movable and immovable properties on the ground that the information sought for was qualified to be personal information as defined in clause (j) of section 8(1) of the Right to Information Act, 2005.

The Supreme Court held that the details called for by the petitioner, i.e., copies of all memos issued to the third respondent, show-cause notices and orders of censure/punishment, etc. were qualified to be personal information as defined in clause (j) of section 8(1) of the RTI Act. The performance of an employee/officer in an organisation is primarily a matter between the employee and the employer and normally those aspects are governed by the service rules which fall under the expression “personal information”, the disclosure of which has no relationship to any public activity or public interest. On the other hand, the disclosure of which would cause unwarranted invasion of privacy of that individual. Of course, in a given case, if the Central Public Information Officer or the State Public Information Officer of the appellate authority is satisfied that the larger public interest justifies the disclosure of such information, appropriate orders could be passed but the petitioner cannot claim those details as a matter of right.

The Supreme Court further held that the details disclosed by a person in his income-tax are “personal information” which stand exempted from disclosure under clause (j) of section 8(1) of the RTI Act, unless involves a larger public interest and the Central Public Information Officer or the State Public Information Officer or the appellate authority is satisfied that the larger public interest justifies the disclosure of such information.

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Exports — Taxability of profits u/s.28 — Deduction under Chapter VIA — DEPB is ‘cash assistance’ receivable by a person against exports and fall under clause (iiib) of section 28 and is chargeable to tax even before it is transferred by the assessee (in the year of entitlement) and profit on transfer of DEPB fall under clause (iiid) of section 28 and were chargeable to tax in the year of transfer — If the assessee having export turnover of more than Rs.10 crore does not satisfy the two conditio<

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[Topman Exports v. CIT, (2012) 342 ITR 49 (SC)]

During the previous year relevant to the A.Y. 2002- 03, the assessee, a manufacturer and exporter of fabrics and garments, sold the DEPB and DFRC (Duty Free Replenishment Certificate) which had accrued to it on export of its productions. The assessee filed a return for the A.Y. 2002-03 claiming a deduction of Rs.83,69,303 u/s.80HHC of the Act. The Assessing Officer held that if the profit on transfer of the export incentive was deducted from the profits of the assessee, the figure would be a loss and there will be no positive income of the assessee from its export business and the assessee will not be entitled to any deduction u/s.80HHC of the Act as has been held by this Court in IPCA Laboratory Ltd. v. Deputy CIT, (2004) 266 ITR 521 (SC). Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) and contended that the profits on the transfer of DEPB and DFRC were not the sale Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings proceeds of the DEPB and the DFRC amounting to Rs.2,06,84,841 and Rs.1,65,616, respectively, but the difference between the sale value and face value of the DEPB and the DFRC amounting to Rs.14,35,097 and Rs.19,902, respectively, and if these figures of profits on transfer of the DEPB and the DFRC are taken, the income of the assessee would be positive and the assessee would be entitled to the deduction u/s.80HHC of the Act. The Commissioner of Income-tax (Appeals) rejected this contention of the assessee and held that the assessee had received an amount of Rs.2,06,84,841 on sale of the DEPB and an amount of Rs.1,65,612 on sale of the DFRC and the costs of acquisition of the DEPB and the DFRC are to be taken as nil and hence the entire sale proceeds of the DEPB and the DFRC realised by the assessee are to be treated as profits on transfer of the DEPB and the DFRC for working out the deduction u/s.80HHC of the Act and directed the Assessing Officer to work out of the deduction u/s.80HHC of the Act accordingly.

Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short ‘the Tribunal’). A Special Bench of the Tribunal heard the appeal and held that there was a direct relation between the entitlement under the DEPB Scheme and the customs duty component in the cost of imports used in the manufacture of the export products. The Tribunal further held that the DEPB accrues to the exporter soon after export is made and application is filed for the DEPB and the DEPB is a ‘cash assistance’ receivable by the assessee and is covered under clause (iiib) of section 28 of the Act, whereas profit on the transfer of the DEPB takes place on a subsequent date when the DEPB is sold by the assessee and is covered under clause (iiid) of section 28 of the Act. The Tribunal compared the language of section 28(iiib) of the Act in which the expression ‘cash assistance’ is used, with the language of section 28(iiia), (iiid) and (iiie) of the Act in which the expression ‘profit’ is used and held that the words ‘profit on transfer’ in section 28(iiid) and (iiie) of the Act would not represent the entire sale value of the DEPB but the sale value of the DEPB less the face value of the DEPB. With these reasons, the Tribunal set aside the orders of the Assessing Officer and the Commissioner of Incometax (Appeals) and directed the Assessing Officer to compute the deduction u/s.80HHC of the Act accordingly.

Against the judgment and order of the Tribunal, the Commissioner of Income-tax, Mumbai, filed appeal u/s.260A of he Act before the High Court and by the impugned order the High Court disposed of the appeal in terms of the judgment delivered in CIT v. Kalpataru Colours and Chemicals, [ITA(L) 2887 of 2009] (328 ITR 451). In Commissioner of Income-tax v. Kalpataru Colours and Chemicals (supra), the High Court formulated the following two substantial questions of law (page 454 of 328 ITR):

“(a) Whether the Tribunal is justified in holding that the entire amount received on the sale of the Duty Entitlement Pass Book does not represents profits chargeable u/s.28(iiid) of the Income-tax Act, 1961, and that the face value of the Duty Entitlement Pass Book shall be deducted from the sale proceeds?

(b) Whether the Tribunal is justified in holding that the face value of the Duty Entitlement Pass Book is chargeable to tax u/s.28(iiib) at the time of accrual of income, i.e., when the application for Duty Entitlement Pass Book is filed with the competent authority pursuant to the exports made and that the profits on the sale of the Duty Entitlement Pass Book representing the excess of the sale proceeds over the face value is liable to be considered u/s.28(iiid) at the time of sale?”

In its judgment, on the first question of law formulated under (a), the High Court held that the Tribunal was not justified in holding that the entire amount received on the sale of the DEPB does not represent profits chargeable u/s.28(iiid) of the Act and in holding that the face value of the DEPB shall be deducted from the sale proceeds of the DEPB. On the second question of law formulated under (b), the High Court in its judgment did not agree with the Tribunal that the face value of the DEPB is chargeable to tax as income of the assessee u/s.28(iiib) of the Act and instead held that the entirety of sale consideration for transfer of the DEPB would fall within the purview of section 28(iiid) of the Act.

Against the judgment and order of the High Court the assessee appealed before the Supreme Court under Article 136 of the Constitution. The Supreme Court on a reading of the Hand Book on the DEPB and the Export and Import Policy of the Government of India, 1997-2002, observed that it was clear that the objective of the DEPB Scheme was to neutralise the incidence of customs duty on the import content of the export productions. Hence, it had direct nexus with the cost of the imports made by an exporter for manufacturing the export products. The neutralisation of the cost of customs duty under the DEPB Scheme, however, was by granting a duty credit against the export product and this credit could be utilised for paying customs duty on any item which is freely importable. DEPB was issued against the exports to the exporter and was transferable by the exporter.

It was clear from reading of the provisions of section 28 that under clause (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India is by itself income chargeable to income-tax under the head ‘Profits and gains of business or profession’. DEPB was a kind of assistance given by the Government of India to an exporter to pay customs duty on its imports and it was receivable once exports were made and an application was made by the exporter for the DEPB. The Supreme Court therefore, held that the DEPB was ‘cash assistance’ receivable by a person against exports under the scheme of the Government of India and fell under clause (iiib) of section 28 and was chargeable to Income-tax under the head ‘Profits and gains of business or profession’ even before it was transferred by the assessee.

Under clause (iiid) of section 28, any profit on transfer of the DEPB is chargeable to Income-tax under the head ‘Profits and gains of business or profession’ as an item separate from cash assistance under clause (iiib). The Supreme Court held that the word ‘profit’ meant the gross proceeds of a business transaction less the costs of the transaction.

It was further held that ‘Profits’ therefore, imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. As DEPB had a direct nexus with the cost of imports for manufacturing an export product, any amount realised by the assessees over and above the DEPB on transfer of the DEPB would represent profit on the transfer of the DEPB.

The Supreme Court therefore held that while the face value of the DEPB would fall under clause (iiib) of section 28 of the Act, the difference between the sale value and the face value of the DEPB would fall under clause (iiid) of section 28 of the Act and the High Court was not right in taking the view in the impugned judgment that the entire sale proceeds of the DEPB realised on transfer of the DEPB and not just the difference between the sale value and the face value of the DEPB represent profit on transfer of the DEPB.

(i)    The Supreme Court further held that: (i) cost of acquiring the DEPB was not nil, because the person acquired it by paying customs duty on the import content of the export product and the DEPB which accrues to a person against exports had a cost element in it. Accordingly, when the DEPB is sold by a person, his profit on transfer of the DEPB would be the sale value of the DEPB less the face value of DEPB which represents the cost of the DEPB.

(ii)    The DEPB represents part of the cost incurred by a person for manufacture of the export product and hence even where the DEPB is not utilised by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, the DEPB is transferred by a person, the entire sum received by him on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB.

(iii)    If in the same previous year the DEPB accrues to a person and he also earns profit on transfer of the DEPB, the DEPB will be business profits under clause (iiib) and the difference between the sale value and the DEPB (face value) would be the profits on the transfer of the DEPB under clause (iiid) for the same assessment year. Where, however, the DEPB accrues to a person in one previous year and the transfer of the DEPB takes place in a subsequent previous year, then the DEPB will be chargeable as income of the person for the first assessment year chargeable under clause (iiib) of section 28 and the difference between the DEPB credit and the sale value of the DEPB credit would be income in his hands for the subsequent assessment year chargeable under clause (iiid) of section 28.

The Supreme Court then held that s.s (1) of section 80HHC, makes it clear that an assessee engaged in the business of export out of India of any goods or merchandise to which this section applies shall be allowed, in computing his total income, a deduction to the extent of profits referred to in s.s (IB), derived by him from the export of such goods or merchandise. S.s (IB) of section 80HHC gives the percentages of deduction of the profits allowable for the different assessment years from the A.Ys. 2001-02 to 2004-05. S.s (3)(a) of section 80HHC provides that where the exports out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such exports shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee.

Explanation (baa) u/s.80HHC states that ‘profits of the business’ in the aforesaid formula means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by (1) ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature including any such receipts and (2) the profits of any branch office, warehouse or any other establishment of the assessee situated outside India. Thus, ninety per cent, of the DEPB which is ‘cash assistance’ against exports and is covered under clause (iiib) of section 28 will get excluded from the ‘profits of the business’ of the assessee if such DEPB has accrued to the assessee during the previous year. Similarly, if during the same previous year, the assessee has transferred the DEPB and the sale value of such DEPB is more than the face value of the DEPB, the difference between the sale value of the DEPB and the face value of the DEPB will represent the profit on transfer of DEPB covered under clause (iiid) of section 28 and ninety per cent of such profit on transfer of DEPB certificate will get excluded from ‘profits of the business’. But, where the DEPB accrues to the assessee in the first previous year and the assessee transfers the DEPB certificate in the second previous year, only ninety per cent of the profits on transfer of DEPB covered under clause (iiid) and not ninety per cent of the entire sale value including the face value of the DEPB will get excluded from the ‘profits of the business’.

To the figure of profits derived from exports worked out as per the aforesaid formula u/ss. (3) (a) of section 80HHC, the additions as mentioned in first, second, third and fourth proviso u/s.(3) are made to profits derived from exports. Under the first proviso, ninety per cent of the sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 are added in the same proportion as export turnover bears to the total turnover the business carried on by the assessee. In this first proviso, there is no addition of any sum referred to in clause (iiid) or clause (iiie). Hence, profit on transfer of the DEPB or the DFRC are not be added under the first proviso.

The second proviso to s.s (3) of section 80HHC states that in case of an assessee having export turnover not exceeding Rs.10 crore during the previous year, after giving effect to the first proviso, the export profits are to be increased further by the amount which bears to ninety per cent of any sum referred to in clauses (iiid) and (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assesses. The third proviso to s.s (3) states that in case of an assessee having export turnover exceeding Rs.10 crore, similar addition of ninety per cent of the sums referred to in clause (iiid) of section 28 only if the asses-see has the necessary and sufficient evidence to prove that (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate or credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme. Therefore, if the assessee having export turnover of more than Rs.10 crore does not satisfy these two conditions, he will not be entitled to the addition of profit on transfer of DEPB under the third proviso to s.s (3) of the section 80HHC.

New Industrial Undertaking — Special deduction — The gross total income of the assessee has first got to be determined after adjusting losses, etc., and if the gross total income of the assessee is ‘nil’, the assessee would not be entitled to deductions u

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2 New Industrial Undertaking — Special
deduction — The gross total income of the assessee has first got
to be determined after adjusting losses, etc., and if the gross total income of
the assessee is ‘nil’, the assessee would not be entitled to deductions under
Chapter VI-A of the Act.


[Synco Industries Ltd. v. CIT, (2008) 299 ITR 444
(SC)]

The appellant-assessee is a company incorporated under the
provisions of the Companies Act, 1956. It is engaged in the business of oil and
chemicals. It has a unit for oil division at Sirohi District, Rajasthan. It has
also a chemical division at Jodhpur. The appellant had earned profit in the
A.Ys. 1990-91 and 1991-92 in both the units. However, the appellant had suffered
losses in the oil division in earlier years. The appellant claimed deductions
u/s.80HH and u/s.80-I of the Act, claiming that each unit should be treated
separately and the loss suffered by the oil division in earlier years is not
adjustable against the profits of the chemical division while considering the
question whether deductions u/s.80HH and u/s.80-I were allowable.

 

The Assessing Officer noticed that the gross total income of
the appellant before deductions under Chapter VI-A was ‘nil’. Therefore, he
concluded that the assessee was not entitled to the benefit of deductions under
Chapter VI-A. Feeling aggrieved, the appellant carried the matters in appeal
before the Commissioner of Income-tax (Appeals) who confirmed the view of the
Assessing Officer by dismissing the same. Therefore, the appellant preferred
appeals before the Income-tax Appellate Tribunal.

 

The Tribunal held that gross total income of the appellant
had got to be computed in accordance with the Act before allowing deductions
under any Section falling under Chapter VI-A and as the gross total income of
the appellant after setting off the business losses of the earlier years was
‘nil’, the appellant was not entitled to any deduction either u/s.80HH or S.
80-I of the Act. In that view of the matter the Tribunal dismissed the appeals
filed by the appellant. The High Court also dismissed the same by judgment dated
July 23, 2001.

 

On further appeal, the Supreme Court held that Ss.(1) of S.
80A lays down that while computing the total income of an assessee, deductions
specified in S. 80C to S. 80U shall be allowed from his gross total income. This
Section has introduced a new concept of ‘gross total income’ as distinguished
from the ‘total income’ i.e., the net or taxable income.

 

Clause (5) of S. 80B defines the expression ‘gross total
income’ to mean the total income computed in accordance with the provisions of
the Act before making any deductions under Chapter VI-A of the Act. It follows,
therefore, that deductions under Chapter VI-A can be given only if the gross
total income is positive and not negative. If the gross total income of the
assessee is determined as ‘nil’, then there is no question of any deduction
being allowed under Chapter VI-A in computing the total income.

 

The Assessing Officer has to take into account the provisions
of S. 71 providing for set-off of loss from one head against income from another
and S. 72 providing for carry forward and set-off of business losses. S. 32(2)
makes provisions for carry forward and set-off of the unabsorbed depreciation of
a particular year. The effect of the abovementioned provisions is that while
computing the total income, the losses carried forward and depreciation have to
be adjusted and thereafter the Assessing Officer has to work out the gross total
income of the assessee.

 

Ss.(2) of S. 80A specifically enacts that the aggregate of
deductions under Chapter VI-A should not exceed the gross total income of the
assessee. If the gross total income is found to be a net loss on account of the
adjustment of losses of the earlier years or ‘nil’, no deduction under this
Chapter can be allowed.

 

As noticed earlier clause (5) of S. 80B of the Act is that
‘gross total income’ to mean the total income computed in accordance with the
provisions of the Act without making any deductions under Chapter VI-A. The
effect of clause (5) of S. 80B of the Act is that “gross total income” will be
arrived at after making the computation as follows :

(i) making deductions under the appropriate computation
provisions;

(ii) including the incomes, if any u/s.60 to u/s.64 in the
total income of the individual;

(iii) adjusting intra-head and/or inter-head losses; and

(iv) setting off brought forward unabsorbed losses and
unabsorbed depreciation, etc.

 


The Supreme Court therefore held that the High Court was
justified in holding that the loss from the oil division was required to be
adjusted before determining the gross total income and as the gross total income
was ‘nil’, the assessee was not entitled to claim deduction under Chapter VI-A
which includes S. 80-I also. The proposition of law, emerging from the above
discussion is that the gross total income of the assessee has first got to be
determined after adjusting losses, etc., and if the gross total income of the
assessee is ‘nil’, the assessee would not be entitled to deductions under
Chapter VI-A of the Act.

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Business expenditure — If income from an activity is assessed as an income, expenditure incurred in respect of that activity should be allowed.

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1 Business expenditure — If income from an
activity is assessed as an income, expenditure incurred in respect of that
activity should be allowed.


[Kerala Road Lines v. CIT, (2008) 299 ITR 343 (SC)]

The assessee entered into an agreement with M/s. Peirce
Leslie (India) Ltd. on September 27, 1983, for purchase of 466 cents of land
with buildings thereon at Calicut. It was agreed that the sale deed will either
be got executed in favour of the assessee or its nominees. As per the agreement,
if the purchase price was not paid within the specified time, the assessee was
liable to pay interest at the rate of 18% per annum. The buildings standing on
the lands were demolished and the scrap materials were sold for Rs.5,88,001.
This income was treated as business income. Under the agreement, the assessee
had to pay an interest of Rs.4 lakhs for the delayed payment of purchase
consideration.

 

The assessee claimed this amount as a revenue expenditure.
The assessing authority disallowed the claim of the assessee on the ground that
the payment of interest on the purchase of the property would be in the nature
of capital expenditure and not revenue expenditure.

 

This order of the assessing authority was confirmed by the
Commissioner of Income-tax (Appeals). It was held that the intention of the
assessee was to enter into an adventure in the nature of trade and ultimately
the assessee had retained only 65.57 cents of land with it and the remaining
land was purchased by the sister concerns of the assessee in small pieces. It
was held that since the assessee was only an intermediary for the other sister
concerns, the part of interest referable to the lands sold to the sister
concerns could not be allowed as revenue expenditure. Thus, the Commissioner of
Income-tax gave part relief and allowed the interest referable to 65.57 cents of
land retained by the assessee. The assessee, being aggrieved, filed an appeal
before the Income-tax Appellate Tribunal.

 

The Tribunal accepted the appeal, set aside the order passed
by the Commissioner of Income-tax (Appeals). It was held that the assessee had
entered into an agreement to purchase the entire property including buildings
standing thereon. The buildings were demolished and structures standing thereon
were sold as scrap material for Rs.5,88,001. This sum was offered for assessment
as business income and assessed as such. The payment of interest of Rs.4 lakhs
for the delayed payment of purchase consideration has been provided in the
agreement and thus, the payment of interest was a contractual obligation. It was
held by the Tribunal that, the payment of interest was to be viewed as an
expenditure u/s.37 of the Income-tax Act, 1961, especially when the sale
proceeds of the scrap materials from the demolished structures have been treated
as business income and ultimately allowed the claim of the assessee for
deduction of interest.

 

The High Court, without answering the question as to whether
the expenditure is capital or revenue in nature, reversed the decision of the
Tribunal by holding that the assessee was not doing the business in real estate;
that the business of the assessee was transport only and, therefore, the
expenditure would not be covered by the provisions of S. 37(1) of the Act.

 

On appeal to the Supreme Court by the Department, it was held
that once the Revenue has accepted the sum of Rs.5,88,001 (being sale proceeds
from the scrap material of the structures standing on the lands) as business
income, then correspondingly the assessee would be entitled to claim the sum of
Rs.4 lakhs as revenue expenditure paid as interest on the delayed payment of the
purchase consideration.

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Business expenditure — Interest on borrowings — Assessee has to establish, in the first instance, its right to claim deduction under one of the Sections between S. 30 to S. 38 and in the case of the firm if it claims special deduction, it has also to prov

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5 Business expenditure — Interest on
borrowings — Assessee has to establish, in the first instance, its right to
claim deduction under one of the Sections between S. 30 to S. 38 and in the case
of the firm if it claims special deduction, it has also to prove that it is not
disentitled to claim deduction of applicability of S. 40(b)(iv).


[Munjal Sales Corporation v. CIT, (2008) 298 ITR 298
(SC)]

In August/September, 1991, the appellant-assessee granted
interest-free advances to its sister concerns which were disallowed by the
Department on the ground that the said advances were not given from the firm’s
own funds but from interest bearing loans taken by the assessee-firm from third
parties. Accordingly, the assessee’s claim for deduction u/s.36(1)(iii) was
disallowed by the Department for the A.Y. 1992-93.

 

However, the Tribunal deleted the disallowance, saying that
the assessee had given such advance from its own funds. In the next A.Y. 1993-94
, the same situation look place. During the A.Y. 1994-95, no further advances
were made by the assessee-firm in favour of its concerns. However, during the
A.Y. 1995-96, a small interest-free loan of Rs.5 lakhs was advanced by the
assessee-firm to its sister concern and during the year in question the assessee
had profits of Rs.1.91 crores. The said advance/loan got finally repaid in the
A.Y. 1997-98.

 

For the A.Y. 1994-95, the Department disallowed the claim for
deduction u/s.40(b)(iv), saying that in this case there was diversion of funds
by raising of interest-free loans. The Assessing Officer did not accept the
submission of the assessee that advance(s) made by the assessee were out of
income of the firm. According to the Assessing Officer, the said interest-free
advances to sister concerns were out of monies borrowed by the firm from third
parties on payment of interest, hence the assessee was not entitled to deduction
u/s.40(b) of the 1961 Act. This view was confirmed by the Tribunal.

 

For the A.Ys. 1995-96 and 1996-97, the Tribunal held that
during the said years, no interest-free advances to sister concerns were made
and, therefore, there was no nexus between ‘interest-bearing loans’ taken and
‘interest-free advances’. However, the Tribunal found that there was no material
to show that advances were made to sister concerns out of the firm’s own income
and, therefore, the assessee was not entitled to deduction u/s.40(b)(iv) of the
1961 Act.

 

The Supreme Court after analysing the scheme of the Act and
in particular the provision of S. 36(1)(iii) and S. 40(b), held that every
assessee including a firm has to establish, in the first instance, its right to
claim deduction under one of the Sections between S. 30 to S. 38 and in the case
of the firm if it claims special deduction it has also to prove that it is not
disentitled to claim deduction by reason of applicability of S. 40(b)(iv).

 

The Supreme Court on the facts held that for the A.Y. 1992-93
and the A.Y. 1993-94, the Tribunal held that the loans given to the sister
concerns were out of the firm’s funds and that were advanced for business
purposes. Once it is found that the loans granted in August/September, 1991
continued up to A.Y. 1997-98 and that the said loans were advanced for business
purposes and that interest paid thereon did not exceed 18/12% per annum, the
assessee was entitled to deductions u/s.36(1)(iii) read with S. 40(b)(iv) of the
1961 Act.

 

Further, the Supreme Court observed that during A.Y. 1995-96,
apart from the loan given in August/September, 1991, the assessee advanced
interest-free loan to its sister concern amounting to Rs.5 lakhs. According to
the Tribunal, there was nothing on record to show that the loans were given to
the sister concern by the assessee-firm out of its own funds and, therefore, it
was not entitled to claim deduction u/s.36(1)(iii).

 

The Supreme Court held that finding of the Tribunal was thus
erroneous. The opening balance as on April 1, 1994, was Rs.1.91 crores, whereas
the loan given to the sister concern was a small amount of Rs.5 lakhs. According
to the Supreme Court, the profits earned by the assessee during the relevant
year were sufficient to cover the impugned loan of Rs.5 lakhs. The Supreme Court
accordingly allowed the appeal.

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Business expenditure — Interest on borrowed capital — Prior to insertion of proviso to S. 36(1)(vi) w.e.f. 1-4-2004, an assessee was entitled to claim deduction of interest on capital borrowed for the purposes of its business, irrespective of its use bein

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4 Business expenditure — Interest on borrowed
capital — Prior to insertion of proviso to S. 36(1)(vi) w.e.f. 1-4-2004, an
assessee was entitled to claim deduction of interest on capital borrowed for the
purposes of its business, irrespective of its use being for capital or revenue
purpose.


[Dy. CIT v. Core Health Care Ltd., (2008) 298 ITR 194
(SC)]

The assessee-company was engaged in the business of
manufacture and sale of intravenous solutions. For the A.Y. 1992-93 the assessee
claimed deduction towards expenses aggregating to Rs.2,12,05,459 which included
interest on borrowings of Rs.1,56,76,000 utilised for purchase of machinery.

 

During the assessment year under consideration the assessee
had installed new machinery. The Assessing Officer, disallowed the amount of
Rs.1,56,76,000 placing reliance on the judgment of this Court in Challapalli
Sugar Ltd. v. CIT, (1975) 98 ITR 167, inter alia, on the ground that
during the assessment year under consideration the assessee had installed new
machinery on which production had not started.

 

On appeal, the Commissioner of Income-tax (Appeals) confirmed
the addition of interest amount on borrowings of Rs.1,56,76,000. The matter was
carried in appeal by the assessee. The Tribunal held that the Department was not
justified in adding Rs.1,56,76,000 in the income of the assessee. This decision
was confirmed by the High Court.

 

On appeal by the Department, the Supreme Court noted that
before the High Court it was not the case of the Department that a new business
was set up or commenced during the assessment year under consideration. It was
undisputed before the High Court that three additional machines were installed
by the assessee during the assessment year under consideration for the
production of intravenous injectibles.

 

The Supreme Court upon reading the provisions of S.
36(1)(iii) held that interest on moneys borrowed for the purposes of business is
a necessary item of expenditure in a business. For allowance of a claim for
deduction of interest under the said Section, all that is necessary is that,
firstly, the money i.e., capital, must have been borrowed by the assessee;
secondly, it must have been borrowed for the purpose of business; and, thirdly,
the assessee must have paid interest on the borrowed amount. All that is germane
is : whether the borrowing was, or was not, for the purpose of business.

 

The expression ‘for the purpose of business’ occurring in S.
36(1)(iii) indicates that once the test of ‘for the purpose of business’ is
satisfied in respect of the capital borrowed, the assessee would be entitled to
deduction u/s.36(1)(iii). This provision makes no distinction between money
borrowed to acquire a capital asset or a revenue asset. All that the Section
requires is that the assessee must borrow capital and the purpose of the
borrowing must be for business which is carried on by the assessee in the year
of account.

 

What clause (iii) emphasises is the user of the capital and
not the user of the asset which comes into existence as a result of the borrowed
capital unlike S. 37 which expressly excludes an expenses of a capital nature.
The Legislature has, therefore, made no distinction in S. 36(1)(iii) between
‘capital borrowed for a revenue purpose’ and ‘capital borrowed for a capital
purpose’. An assessee is entitled to claim interest paid on borrowed capital
provided that capital is used for business purpose irrespective of what may be
the result of using the capital which the assessee has borrowed.

 

Further, the words ‘actual cost’ do not find place in S.
36(1)(iii) of the 1961 Act. The expression ‘actual cost’ is defined in S. 32,
32A, etc. of the 1961 Act, which is essentially a definition Section which is
subject to the context to the contrary. S. 43(1) defines ‘actual cost’. The
definition of ‘actual cost’ has been amplified by excluding such portion of the
cost as is met directly or indirectly by any other person or authority.
Explanation 8 has been inserted in S. 43(1) by Finance Act, 1986 (23 of 1986),
with retrospective effect from April 1, 1974.

 

It is important to note that the words ‘actual cost’ would
mean the whole cost and not the estimate of cost. ‘Actual cost’ means nothing
more than the cost accurately ascertained. The determination of actual cost in
S. 43(1) has relevance in relation to S. 32 (depreciation allowance), S. 32A
(investment allowance), S. 33 (development rebate allowance), and S. 41
(balancing charge). The ‘actual cost’ of an asset has no relevance in relation
to S. 36(1)(iii) of the 1961 Act, the Supreme Court however observed that in the
present appeal it was concerned with the A.Ys. 1992-93, 1993-94, 1995-96 and
1997-98.

 

The Supreme Court noted that a proviso has been inserted in
S. 36(1)(iii) of the 1961 Act which denies deductions of interest for the period
beginning from the date on which the capital was borrowed for acquisition of
asset till the date on which the asset was first put to use. The Supreme Court
held that proviso has been inserted by the Finance Act, 2003, with effect from
April 1, 2004. Hence, the said proviso will not apply to the facts of the
present case. The Supreme Court therefore held that the said proviso would
operate prospectively.

 

The Supreme Court held that the Assessing Officer was not
justified in making disallowance of Rs.1,56,76,000 in respect of borrowings
utilised for purchase of machines.

 


Note : The said decision was followed in the following
cases :

1. Jt. CIT v. United Phosphorous Ltd., (2008) 299
ITR 9 (SC)

2. ACIT v. Arvind Polycot Ltd., (2008) 299 ITR 12
(SC)

3. Dy. CIT v. Gujarat Alkalies & Chemicals Ltd.,
(2008) 299 ITR 85(SC)

 


In United Phosphorus Ltd.’s case there was another question
regarding option in law to claim partial depreciation in respect of any block of
assets. The matter was remanded back to the High Court.

 

Method of Accounting — Chit fund — Chit discount accounting on completed contract method cannot be rejected especially when it is revenue neutral.

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3 Method of Accounting — Chit fund — Chit
discount accounting on completed contract method cannot be rejected especially
when it is revenue neutral.


[CIT v. Bilahari Investment P. Ltd., (2008) 299 ITR I
(SC)]

The assessees are private limited companies subscribing to
chits as their business activities. They were maintaining their accounts on the
mercantile basis and they were computing profit/loss, as the case may be, at the
end of the chit period following the completed contract method, which was
earlier accepted by the Department over several years.

 

However, for the A.Ys. 1991-92 to 1997-98, the Assessing
Officer came to the conclusion that the completed contract method was not
accurate in recognising/identifying ‘income’ under the 1961 Act, and according
to him, therefore, in the context of the ‘chit discount’, the correct method was
deferred revenue expenditure calculated on proportionate basis. In other words,
the Assessing Officer has preferred the percentage of completion method as the
basis for recognising/identifying ‘income’ under the 1961 Act in substitution of
the completed contract method.

 

According to the Department, chit dividend had to be
subjected to tax on accrual basis as the assessees were following the mercantile
system of accounting. As far as the chit dividend is concerned, the Department
rejected the completed contract method as suggested by the assessees, which has
been accepted by the Tribunal and the High Court. However, in the matter of chit
discount, the High Court, overruling the Tribunal, has held that the completed
contract method of accounting adopted by the assessees was valid and that the
Department had erred in spreading the discount over the remaining period of the
chit on proportionate basis.

 

In the matter of chit dividend, the assessees accepted the
view of the Tribunal and the High Court that the completed contract method was
not correct.

 

Before the Supreme Court the limited controversy was whether
the completed contract method of accounting adopted by the assessees as method
of accounting for chit discount was required to be substituted by the percentage
of completion method. The Supreme Court noted that Chit funds are basically
saving schemes in which a certain number of subscribers join together and each
contributes a certain fixed sum each month, the total number of months being
equal to the total number of subscribers. The subscriptions are paid to the
manager of the fund by a certain prescribed date each month and the total
subscriptions to the fund are auctioned each month amongst the subscribers. At
each auction, the lowest bidder is paid the amount of his bid and the balance
received from out of the total subscriptions received is distributed equally
amongst other subscribers, as premium. The manager is paid a certain percentage
of the collections each month on account of expenses and charges for conducting
the auction. In the auction, a maximum amount, which the highest bidder agrees
to forgo, is the amount, which is distributed to the other members, subject to
deduction of the manager’s commission.

 

Before the Supreme Court, it was the case of the assessees
that, profits (loss) accrued to the assessees only when the dividends exceeded
the discount paid and that the difference could be known only on the termination
of the chit when the total figure of dividend received and discount paid would
be available. That, it would be possible for the assessees to make profits only
when the sum total of the dividend received exceeded the sum total of discounts
suffered which is debited to the profit and loss account. According to the
assessees, the Department has all along been accepting the completed contract
method and, therefore, there was no justification in law or in facts for
deviating from the accepted practice. According to the assessees, a chit
transaction has been treated by the various Courts as one single scheme running
for the full period and, therefore, according to the assessees, the completed
contract method adopted by it over the years was not required to be substituted
by any other method of accounting.

 

The Supreme Court observed that recognition/identification of
income under the 1961 Act is attainable by several methods of accounting. It may
be noted that the same result could be attained by any one of the accounting
methods. The completed contract method is one such method. Similarly, the
percentage of completion method is another such method. Under the completed
contract method, the revenue is not recognised until the contract is complete.
Under the said method, costs are accumulated during the course of the contract.
The profit and loss is established in the last accounting period and transferred
to the profit and loss account. The said method determines results only when the
contract is completed. On the other hand, the percentage of completion method
tries to attain periodic recognition of income in order to reflect current
performance. The amount of revenue recognised under this method is determined by
reference to the stage of completion of the contract. The stage of completion
can be looked at under this method by taking into consideration the proportion
that costs incurred to date bear to the estimated total costs of contract.

 

The Supreme Court held that it was concerned with the A.Ys.
1991-92 to 1997-98. In the past, the Department had accepted the completed
contract method and because of such acceptance, the assessees, in these cases,
had followed the same method of accounting, particularly in the context of chit
discount. Every assessee is entitled to arrange its affairs and follow the
method of accounting, which the Department has earlier accepted. It is only in
those cases where the Department records a finding that the method adopted by
the assessee results in distortion of profits, can the Department insist on
substitution of the existing method.

 

Further, in the present cases, the Supreme Court noted from
the various statements produced before us, that the entire exercise, arising out
of change of method from the completed contract method to deferred revenue
expenditure, is revenue neutral. Therefore, the Supreme Court did not wish to
interfere with the impugned judgment of the High Court.

 Before concluding, the Supreme Court noted that u/s.211(2) of the Companies Act, Accounting Standards (‘AS’) enacted by the Institute of Chartered Accountants of India have now been adopted. The learned counsel for the Department, had placed reliance on AS-22 as the basis of his argument that the completed contract method should be substituted by deferred revenue expenditure (spreading the said expenditure on proportionate basis over a period of time). He also relied upon the concept of timing difference introduced by AS-22.

The Supreme Court observed that all these developments were of recent origin and it was open to the Department to consider these new accounting standards and concepts in future cases of chit transactions. The Supreme Court however expressed no opinion in that regard, stating that these new concepts and accounting standards had not been invoked by the Department in the present batch of civil appeals.

Salary — Perquisite — Stock option issued subject to conditions is not a ‘perquisite’ — Law amended by insertion of S. 17(2)(iii)(a) in the Act w.e.f. 1-4-2000 is not retrospective.

New Page 2

10 Salary — Perquisite — Stock option issued
subject to conditions is not a ‘perquisite’ — Law amended by insertion of S.
17(2)(iii)(a) in the Act w.e.f. 1-4-2000 is not retrospective.


[CIT v. Infosys Technologies Ltd., (2008) 297 ITR 167
(SC)]

The respondent-assessee, a public limited IT company based in
Bangalore, to implement the Employees’ Stock Option Scheme (‘the ESOP’), created
a trust known as Technologies Employees’ Welfare Trust and allotted 7,50,000
warrants at Re.1 each to the said trust. Each warrant entitled the holder
thereof to apply for and be allotted one equity share of the face value of Rs.10
each for a total consideration of Rs.100. The trust was to hold the warrant and
transfer the same to the employees of the company under the terms and conditions
of the scheme governing the ESOP. During the A.Ys. 1997-98, 1998-99 and
1999-2000, warrants were offered to the eligible employees at Re.1 each by the
Trust. They were issued to the employees based on their performance, security
and other criteria. Under the ESOP scheme, every warrant had to be retained for
a minimum period of one year. At the end of that period, the employee was
entitled to elect and obtain shares allotted to him on payment of the balance
Rs.99. The option could be excised at any time after 12 months, but before the
expiry of the period of five years. The allotted shares were subject to a
lock-in period. During the lock-in period, the custody of the shares remained
with the trust. The shares were non-transferable. The employee had to continue
to be in service for 5 years. If he resigned or if his services be terminated
for any reason, he lost his right under the scheme and the shares were to be
re-transferred to the trust for Rs.100 per share. Intimation was also given to
the BSE that 7,34,500 equity shares were non-transferable and would not
constitute good delivery. Till September 13, 1999, all the shares were stamped
with the remark ‘non-transferable’. Thus the said shares were incapable of being
converted into money during the lock-in period.

 

For the A.Y. 1999-2000, the Assessing Officer held that the
total amount paid by the employees, consequent to the exercise of option was
Rs.6.64 crores, whereas the market value of those shares was Rs.171 crores. He
held that the ‘perquisite value’ was the difference between the market value and
the price paid by the employees for exercise of the option. He, therefore,
treated Rs.165 crores as ‘perquisite value’ on which TDS was charged at 30%. It
was held that the respondent-assessee was a defaulter for not deducting TDS
u/s.192 amounting to Rs.49.52 crores on the above perquisites value Rs.165
crores. Similar orders were also passed by the Assessing Officer for the A.Y.s
1997-98 and 1998-99. These orders were confirmed by the Commissioner of
Income-tax (Appeals). No weightage was given by both the authorities to the
lock-in period. Both the authorities took into account the ‘perquisite value’ as
on the date of exercise of option. Aggrieved by the aforesaid decisions, the
respondent-assessee carried the matter in appeal to the Tribunal, which took the
view that the right granted to the employee for participating in the scheme was
not a ‘perquisite’ u/s.17(2)(iii) of the Act. This decision of the Tribunal
stood confirmed by the judgment delivered by the Karnataka High Court on
December 15, 2006. On civil appeals by the Department, the Supreme Court noted
that during the A.Ys. 1997-98, 1998-99 and 1999-2000, there was no provision in
the Act which made the benefit by way of ESOP taxable as income specifically. It
became specifically taxable only with effect from April 1, 2000, when S. 17(2)(iii)(a)
stood inserted. However, the issue before it was not with regards to the
taxability of the perquisite, but was with regards to the value of perquisite.
The Supreme Court held that a warrant is a right without an obligation to buy.
Therefore, a ‘perquisite’ cannot be said to accrue at the time when warrants
were granted. The same would be the position when options vested in the
employees after a lapse of 12 months, as it was open to the employees not to
avail of the benefit of option. It was open to the employees to resign and there
was no certainty that the option would be exercised. Further, the shares were
not transferable for a period of 5 years (lock-in-period). If an employee
resigned during the lock-in-period the shares had to be retransferred. During
the lock-in-period, possession of the shares remained with the trust. The shares
were not transferable and it was not open to hypothecate or pledge the said
shares during the lock-in-period. During the said period, the shares had no
realisable value, hence, there was no cash inflow to the employees on account of
mere exercise of options. On the date when the option was exercised, it was not
possible for the employees to foresee the future market value of the shares.
Therefore, the benefit, if any, which arose on the date when the option stood
exercised was only a notional benefit whose value was unascertainable. The
difference in the market value of shares on the date of exercise of option and
the total amount paid by the employees consequent upon exercise of the said
option therefore cannot be treated as perquisite. The Supreme Court further held
that S. 17(2)(iii)(a) inserted by the Finance Act, 1997 w.e.f. 1-4-2000 was not
clarificatory and retrospective in operation because till 1-4-2000, in the
absence of the definition of ‘cost’, the value of the option was
unascertainable. The Supreme Court held that the Department was not justified in
treating Rs.165 crores as the perquisite value for the A.Y.s 1997-98 to
1999-2000 and the assessee was not in default for not deducting tax thereon.

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Export — Deduction u/s.80 HHC — Export profits in the business of growing, manufacturing and exporting of tea — Deduction u/s.80 HHC to be computed after apportionment, only against 40% of proportionate income

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8 Export — Deduction u/s.80 HHC — Export
profits in the business of growing, manufacturing and exporting of tea —
Deduction u/s.80 HHC to be computed after apportionment, only against 40% of
proportionate income.


[CIT v. Williamson Financial Services & Ors., (2007)
297 ITR 17 (SC)]

Rule 8(1) of the Rules provides that 40% of the composite
income from sale of tea, grown and manufactured, arrived at on making of the
apportionment “shall be deemed to be income liable to tax”.

 

The assessee exported tea in the accounting year. They were
entitled to deduction u/s.80HHC, in respect of the export. They were in the
business of growing and manufacturing tea. Since they earned composite income,
their case stood covered by Rule 8(1). In the returns, the assessee claimed S.
80HHC deduction against the entire composite income before application of Rule
8(1). This working was rejected by the Assessing Officer who took the view that
the deduction u/s.80HHC can be allowed after the 60 : 40 apportionment as 40%
income was the gross total income. However, in appeal, the Commissioner of
Income-tax (Appeals) reversed the decision of the Assessing Officer by holding
that the Assessing Officer should have first granted the S. 80HHC deduction
against the entire tea income before applying Rule 8(1). Against the said
decision of the Commissioner of Income-tax (Appeals), the matter was carried in
appeal to the Tribunal who took the view that the Assessing Officer was right in
allowing S. 80HHC deduction only against part of the income from tea, which was
taxable under the 1961 Act, namely, 40% of the income. This view of the Tribunal
stood reversed by the High Court. On appeal, the Supreme Court held that
‘Agricultural income’ falls in the category of exempted income. It is neither
chargeable nor includible in the total income. On the other hand, deduction
under Chapter VI-A is for ‘income’ which forms part of total income but which is
tax-free. Rule 8(1) segregates agricultural income which is exempted income from
business income which is chargeable to tax. Therefore, to the extent of 40% only
the income is chargeable and computable. In this view of the matter, the
assessee cannot claim S. 80HHC(3)(c) deduction u/s.80HHC(3)(a) against the
entire tea composite income and can claim only against proportionate income.

Export — Deduction u/s.80HHC — Amendment made by the Finance (No. 2) Act, 1991, in S. 80HHC of the Income-tax Act, 1961, with effect from April 1, 1992, to the effect that for the purpose of the special deduction thereunder business profits will not inclu

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9 Export — Deduction u/s.80HHC — Amendment
made by the Finance (No. 2) Act, 1991, in S. 80HHC of the Income-tax Act, 1961,
with effect from April 1, 1992, to the effect that for the purpose of the
special deduction thereunder business profits will not include receipts by way
of brokerage, commission, interest, service charges, etc., is only prospective
in nature.


[K. K. Doshi & Co. v. CIT, (2008) 297 ITR 38 (SC)]

The Bombay High Court in CIT v. K. K. Doshi & Co.,
(2000) 245 ITR 849 (Bom.) had held that amendment in law from the A.Y. 1992-93
that the business profits would not include receipts by way of brokerage,
commission, interest, rent charges or any other receipt of a similar nature was
clarificatory in nature and therefore retrospective in operation. On an appeal,
the Supreme Court following its decision in P. R. Prabhakar (2006) 284 ITR 548
(SC) held that the amendment in question was prospective in nature.

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Substantial Question of Law — Whether reassessment made without issue of notice u/s.143(2) of the Act is invalid, is a substantial question of law.

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 13 Substantial Question of Law — Whether
reassessment made without issue of notice u/s.143(2) of the Act is invalid, is a
substantial question of law.


[L. N. Hota and Company v. CIT, (2008) 301 ITR 184
(SC)]

The Assessing Officer issued a notice on 3-12-1998 to the
assessee u/s.148 of the Act, requiring the assessee to file the return of its
income for the A.Y. 1997-98, which was served on 7-12-1998. The assessee filed
the return of income on 5-1-1999, whereafter the AO issued a notice u/s.142(1)
on 28-6-2000. The AO, vide his order dated 27-11-2000, completed the assessment
estimating the income of the assessee from the business by applying the
provisions of S. 145 of the Act. The assessee’s appeal was dismissed by the
Commissioner of Income-tax (Appeals) vide his order dated 4-1-2002 without
adjudicating the issue of legality of the assessment. An application u/s.154 was
also rejected by the Commissioner of Income-tax (Appeals) vide his order dated
25-2-2002. The Tribunal vide its order dated 13-4-2004, rejected the priority
prayer of the assessee that assessment made without issuance of notice
u/s.143(2) within a period of one year was invalid, but on the merits of the
case, remanded the matter to the AO. On appeal, the Orissa High Court in its
order dated 14-8-2006 dismissing the appeal held that as the assessment order
had not come about by way of scrutiny, the provisions of S. 143(2) would not be
applicable. On an appeal by way of special leave to the Supreme Court, it was
held that though the question of the applicability of S. 143(2) was specifically
raised throughout, prima facie, no finding based on law as it stood, had
been recorded. The Supreme Court therefore remitted the matter to the High Court
for a fresh decision in accordance with the law.

 

 

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Depreciation — Membership card of Bombay Stock Exchange is an ‘intangible asset’ on which depreciation is allowable u/s.32(1)(ii).

Glimpses of supreme court rulings

12. Depreciation — Membership card of Bombay Stock Exchange
is an ‘intangible asset’ on which depreciation is allowable u/s.32(1)(ii).


[Techno Shares and Stocks Ltd. v. CIT, (2010) 327 ITR
323 (SC)]

The assessee-company filed its return of income for the A.Y.
1999-2000, disclosing a loss of Rs.10,77,276. The return was processed
u/s.143(1) on November 8, 2000. The case stood re-opened u/s.147 and the notice
u/s.148 was issued to the assessee on July 16, 2002. The assessee filed its
return of income under protest. The assessee filed its return of income pursuant
to the notice u/s.148 once again declaring loss of Rs.10,77,276, the same as was
in the original return of income. The main reason for reopening of the
assessment u/s.147 was the claim of depreciation by the assessee on the BSE
membership card amounting to Rs.23,65,000. The claim of depreciation of the
assessee was based on S. 32(1)(ii) which stood inserted by the Finance (No. 2)
Act, 1998, with effect from April 1, 1999. However, the said Section deals with
claims for depreciation of items acquired on or after April 1, 1998. The
assessee claimed before the Assessing Officer that the BSE membership card is a
‘licence’ or ‘business or commercial right of similar nature’ u/s.32(1)(ii) and
is, therefore, an intangible asset eligible for depreciation u/s.32(1)(ii), the
submission of which was not accepted by the Assessing Officer. It was held that
membership is only a personal permission which is non-transferable and which
does not devolve automatically on legal heirs and, therefore, it is not a
privately owned asset. That, there is no ownership of an asset and that what
ultimately can be sold is only a right to nomination. Further, according to the
Assessing Officer, in the case of BSE membership, there is no obsolescence, wear
and tear or diminution in value by its use, hence, the assessee was not entitled
to claim depreciation u/s.32(1)(ii). This decision of the AO stood affirmed by
the Commissioner of Income-tax (Appeals) in the appeal filed by the assessee.

Aggrieved by the said decision of the Commissioner of
Income-tax (Appeals), the assessee carried the matter in appeal to the Tribunal
which took the view that since the assessee had acquired a right to trade on the
floor of the BSE through the membership card, it was entitled to depreciation
u/s.32(1)(ii) of the 1961 Act. That, the said card is a capital asset through
which the right to trade on the floor of the BSE is acquired and since it is an
intangible asset the said assessee was entitled to depreciation u/s.32(1)(ii).

Against the said decision, the Department carried the matter
in appeal to the High Court which came to the conclusion, following certain
decisions of the Supreme Court, that the BSE membership card is only a personal
privilege granted to a member to trade in shares on the floor of the stock
exchange; that such a privilege cannot be equated with the expression ‘licence’
or ‘any other business or commercial rights of similar nature’ u/s.32(1)(ii);
that, there is a difference between acquiring a know-how, patent, copyright or
trade mark or franchise; that the expression ‘business or commercial rights of
similar nature’ in S. 32(1)(ii) of the 1961 Act would take its colour from the
preceding words. Namely, know-how, patent, copyright, trade mark and franchise
which belong to a class of intellectual property rights and applying the rule of
ejusdem generis, the High Court held that the expression ‘licence’ as well as
the expression ‘business or commercial right of similar nature’ in S. 32(1)(ii)
of the 1961 Act are referable to IPRs such as know-how, patent, copyright, trade
mark and franchise and since the BSE membership card does not fall in any of the
above categories, the claim for depreciation was not admissible on the BSE
membership card acquired by the assessee u/s.32(1)(ii). Consequently, the
appeals filed by the Department stood allowed.

On civil appeals against the decision of the High Court, the
Supreme Court observed that the question which it was required to examine was —
whether the right of nomination in the non-defaulting continuing member comes
within the expression ‘business or commercial right of similar nature’ in S.
32(1)(ii) of the 1961 Act ?

The Supreme Court held that on the analysis of the Rules of
the BSE, it was clear that the right of membership (including right of
nomination) got vested in the exchange on the demise/default committed by the
member; that, on such forfeiture and vesting in the exchange that the same got
disposed off by inviting offers and the consideration received thereof was used
to liquidate the dues owned by the former/defaulting member to the exchange,
clearing house, etc. (see Rule 16 and bye-law 400). It was this right of
membership which allowed the non-defaulting member to participate in the trading
season on the floor of the exchange. Thus, the said membership right was a
‘business or commercial right’ conferred by the rules of the BSE on the
non-defaulting continuing member.

The next question was — whether the membership right could be said to be owned by the assessee and used for the business purpose in terms of S. 32(1)(ii). The Supreme Court held that its answer was in affirmative for the reason that the rules and bye-laws analysed hereinabove indicated that the right of nomination vested in the exchange only when a member committed default. Otherwise, he continued to participate in the trading session on the floor of the exchange; that he continued to deal with other members of the exchange and even had the right to nominate a subject to compliance with the Rules. Moreover, by virtue of Explanation 3 to S. 32(1)(ii) the commercial or business right which was similar to a ‘licence’ or ‘franchise’ was declared to be an intangible asset. Moreover, under Rule 5, membership was a personal permission from the exchange which was nothing but a ‘licence’ which enabled the member to exercise rights and privileges attached thereto. It was this licence which enabled the member to trade on the floor of the exchange and to participate in the trading session on the floor of the exchange. It was this licence which enabled the member to access the market. Therefore, the right of membership which included right of nomination, was a ‘licence’ which was one of the items which fell in S. 32(1)(ii) of the 1961 Act. The right to participate in the market had an economic and money value. It was an expense incurred by the assessee which satisfied the test of being a ‘licence’ or ‘any other business or commercial right of similar nature’ in terms of S. 32(1)(ii).

The Supreme Court however clarified that the present judgment was strictly confined to the rights of membership conferred upon the member under the BSE membership card during the relevant assessment years. This judgment should not be understood to mean that every business or commercial right would constitute a ‘licence’ or a ‘franchise’ in terms S. 32(1)(ii) of the 1961 Act.

Business expenditure — Foreign exchange borrowings — Loss on account of fluctuation in rate of foreign exchange on the last date of balance sheet — If the borrowings are on revenue account, the loss is allowable as deduction u/s.37(1) and if the same is o

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 25 Business expenditure — Foreign exchange borrowings — Loss
on account of fluctuation in rate of foreign exchange on the last date of
balance sheet — If the borrowings are on revenue account, the loss is allowable
as deduction u/s.37(1) and if the same is on capital account, prior to its
amendment of S. 43A w.e.f. 1-4-2003, even if the repayment is not due, the cost
of the asset acquired is to be increased.

The assessee, a public sector undertaking, substantially
owned by the Government of India, was engaged in capital intensive exploration
and production of petroleum products for which it had to heavily depend on
foreign loan to cover its expenses, both capital and revenue, on import of
machinery on capital account and for payment to non-resident contractors in
foreign currency for various services rendered. The assessee had made three
types of foreign exchange borrowings : (i) in revenue account; (ii) in capital
account, and (iii) for general purposes, partly utilised in revenue account and
partly in capital account. As per terms and conditions of foreign exchange
borrowings, some of the loans became repayable in the year under consideration
but the date of repayment of some loans fell after the end of the relevant
accounting year. The assessee revalued in Indian currency all its foreign
exchange loans in revenue account, capital account as also in its general
purposes account, outstanding as on March 31, 1991 and claimed the difference
between their respective amounts in Indian currency as on 31st March, 1990 and
on March 31, 1991 as revenue loss u/s.37(1) of the Act in respect of loans used
in revenue account, and also took into consideration the similar difference in
foreign exchange on capital account loans as an increased liability u/s. 43A of
the Act for the purposes of depreciation. The foreign exchange loss incurred by
the assessee in the revenue account, on account of repayment of these loans made
in the year under consideration was allowed by the Assessing Officer as a
deduction u/s.37(1) of the Act, and he also took into consideration an increased
liability of foreign exchange loans taken in capital account and repaid in the
accounting year, for the purposes of depreciation, u/s.43A of the Act. He,
however, did not allow to the assessee its claim for foreign exchange loss
claimed on such foreign currency loans both in revenue account and in capital
account which were outstanding on the last day of the accounting year under
consideration and were as per the terms of borrowings repayable after the end of
the relevant accounting year. Similar treatment was given to the foreign
exchange loans for general purposes, used partly in revenue account and partly
in capital account. Thus, the assessee’s claim for foreign exchange
loss/increased liability on revaluation of these foreign exchange loans at the
end of the accounting year under consideration both in the revenue account and
capital account as also on loans used partly in revenue account and partly in
capital account, made on the ground that it had followed mercantile system of
accounting in this regards, was disallowed by the Assessing Officer. According
to the Assessing Officer, such a loss could be allowed to the assessee on
discharge of liability at the time of actual repayment of these loans.

Aggrieved, the assessee preferred appeal before the
Commissioner of Income-tax (Appeals). Inso-far as the assessee’s claim for
foreign exchange loss in revenue account was concerned, the Commissioner of
Income-tax (Appeals) affirmed the view taken by the Assessing Officer on the
ground that it was a notional liability and the same had not crystallised or
accrued in the relevant assessment year. However, as regards the adjustment for
increased liability made by the assessee for the purposes of S. 43A of the Act
in respect of foreign exchange loans in capital account, which were outstanding
as on March 31, 1991, the Commissioner accepted the stand of the assessee and
directed the Assessing Officer to allow the benefit of such increased liability
for computation of depreciation allowance on plant and machinery purchased out
of such foreign exchange loans for the assessment year under consideration.

Being dissatisfied, both the assessee as well as the Revenue
carried the matter in further appeal to the Income Tax Appellate Tribunal (for
short ‘the Tribunal’). The Tribunal observed that the method of accounting
adopted by the assessee right from the A.Y. 1982-83 is mercantile system; it has
been consistently claiming loss suffered by it on account of fluctuation in
foreign exchange rates on accrual basis; in respect of the A.Y. 1982-83 to
1986-87, the assessee’s claim on this account had been allowed by the Assessing
Officer himself; in respect of the A.Y. 1997-98, the assessee had shown a gain
of Rs.293.37 crores on account of fluctuation in foreign exchange because of the
Indian rupee had appreciated as compared to the foreign currency and that the
said amount was taxed as the assessee’s income. Taking all these factors into
consideration, the Tribunal held that the loss claimed by the assessee on
revenue account was allowable u/s.37(1) of the Act. The appeal preferred by the
Revenue on the question whether the assessee was entitled to adjust the actual
cost of imported assets acquired in foreign currency on account of fluctuation
in the rate of exchange, in terms of S. 43A of the Act, was also dismissed.

For the A.Ys. 1992-93, 1993-94, 1994-95 and 1997-98 similar
findings were given by the Tribunal. The Revenue took the matter in further
appeal to the High Court. By a common judgment pertaining to the A.Ys. 1991-92
to 1994-95 and 1997-98, the High Court reversed the decision of the Tribunal on
both the issues. Terming the order of the Tribunal as perverse, having been
passed without any material on record and against the statutory provisions, the
High Court held that the foreign exchange loss by the assessee being only a
contingent and notional liability, it was not allowable as deduction u/s.37(1)
of the Act. Insofar as the applicability of S. 43A of the Act was concerned, the
High Court observed that the said provision is confined only to those
liabilities which have become due as per the terms and conditions of written
agreement between the assessee and the foreign creditors but since in the
present case, no such agreement was made available by the assessee at any stage
of the proceedings, the claim of the assessee was not justified. According to
the High Court, the variation in foreign exchange was neither quantified, nor
had it become due or repaid and, therefore, deductions on that account had been
allowed by the Tribunal without application of mind and were, therefore,
illegal.

On an appeal by the assessee, the Supreme Court was of the
opinion that the ratio of the decision in CIT v. Woodward Governor of India P.
Ltd., (2009) ITR 254 (SC) squarely applied to the facts at hand and, therefore,
the loss claimed by the assessee on account of fluctuation in the rate of
foreign exchange as on the date of balance sheet was allowable as expenditure
u/s.37(1) of the Act.

The Supreme
Court further held that all the assessment years in question being prior to the
amendment in S. 43A of the Act (made with effect from April 1, 2003), the
assessee would be entitled to adjust the actual cost of the imported capital
assets, capital assets acquired in foreign currency, on account of fluctuation in
the rate of exchange at each of the relevant balance sheet dates pending actual
payment of the varied liability.

 

[Oil and Natural Gas Corporation Ltd. v. CIT,
(2010) 322 ITR 180 (SC)]

Loan in foreign currency for acquisition of capital asset — Forward contract for obtaining foreign currency at a pre-determined rate — Roll-over charges paid to carry forward the contract have to be capitalised in view of S. 43A.

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24 Loan in foreign currency for acquisition of capital asset
— Forward contract for obtaining foreign currency at a pre-determined rate —
Roll-over charges paid to carry forward the contract have to be capitalised in
view of S. 43A.

The assessee was engaged in the manufacture of gears and
mechanical handling equipment. It procured a foreign currency loan for expansion
of existing business. Since the repayment of loan was stipulated in instalments,
the assessee wanted to ensure that foreign currency required for repayment of
the loan be obtained at a pre-determined rate and cost. Accordingly, the
assessee booked forward contracts with Citibank for delivery of the required
foreign currency on the stipulated dates. The contract was entered into for the
entire outstanding amount and the delivery of foreign currency was obtained
under the contract for instalment due from time to time. The balance value of
the contract, after deducting the amount withdrawn towards repayment, was rolled
for a further period up to the date of the next instalment. The assessee filed
its return of income for the A.Y. 1986-87 on June 30, 1986. A revised return was
filed by it on March 27, 1989, declaring a total income of Rs.2,10,08,640. The
Assessing Officer disallowed an amount of Rs.8,86,280, being the roll-over
premium charges paid by the assessee in respect of foreign exchange forward
contracts to Citibank N.A. on the ground that the said charges were incurred in
connection with the purchase of a capital asset (plant and machinery), hence, it
was not admissible for deduction u/s.36(1)(iii) or u/s.37 of the Act. On appeal,
the Commissioner of Income-tax (Appeals) held that the roll-over premium charges
incurred by the assessee were allowable as they were incurred by the assessee to
mitigate the risk involved in higher payment because of adverse fluctuation of
rate of exchange. According to the Commissioner of Income-tax (Appeals),
roll-over premium charges constituted an expenditure incurred for raising loans
on revenue account, hence, the said expenditure was allowable under the Act.

The Tribunal held that roll-over premium charges (carry
forward charges) were required to be paid to the authorised dealer as
consideration for permitting the unutilised amount of the contract (balance
value of the contract) to be availed of at a later date and in the circumstances
the roll-over premium charges had to be capitalised under Explanation 3 to S.
43A of the said Act. Consequently, the Tribunal upheld the order of the
assessment.

The High Court came to the conclusion that the roll-over
premium charges paid by the assessee were in the nature of interest or committal
charges, hence, the said charges were allowable u/s.36(l)(iii) of the said Act.

The Supreme Court observed that S. 43A, before its
substitution by a new S. 43A vide the Finance Act, 2002, was inserted by the
Finance Act, 1967, with effect from April 1, 1967, after the devaluation of the
rupee on June 6, 1966. It applied where as a result of change in the rate of
exchange there was an increase or reduction in the liability of the assessee in
terms of the Indian rupee to pay the price of any asset payable in foreign
exchange or to repay moneys borrowed in foreign currency specifically for the
purpose of acquiring an asset. The Section has no application unless an asset
was acquired and the liability existed, before the change in the rate of
exchange. When the assessee buys an asset at a price, its liability to pay the
same arises simultaneously. This liability can increase on account of
fluctuation in the rate of exchange. An assessee who becomes the owner of an
asset (machinery) and starts using the same, becomes entitled to depreciation
allowance. To work out the amount of depreciation, one has to look to the cost
of the asset in respect of which depreciation is claimed. S. 43A was introduced
to mitigate hardships which were likely to be caused as a result of fluctuation
in the rate of exchange. S. 43A lays down, firstly, that the increase or
decrease in liability should be taken into account to modify the figure of
actual cost and, secondly, such adjustment should be made in the year in which
the increase or decrease in liability arises on account of fluctuation in the
rate of exchange. It is for this reason that though S. 43A begins with a non
obstante clause, it makes S. 43(1) its integral part. This is because S. 43A
requires the cost to be recomputed in terms of S. 43A for the purpose of
depreciation [S. 32 and 43(1)]. A perusal of S. 43A makes it clear that insofar
as the depreciation is concerned, it has to be allowed on the actual cost of the
asset, less depreciation that was actually allowed in respect of earlier years.
However, where the cost of the asset subsequently increased on account of
devaluation, the written down value of the asset has to be taken on the basis of
the increased cost minus the depreciation earlier allowed on the basis of the
old cost. U/s.43A, as it stood at the relevant time, it was, inter alia,
provided that where an assessee had acquired an asset from a country outside
India for the purpose of his business, and in consequence of a change in the
rate of exchange at any time after such acquisition, there is an increase or
reduction in the liability of the assessee as expressed in Indian currency for
making payment towards the whole or part of the cost of the asset or for
repayment of the whole or part of the moneys borrowed by him for the purpose of
acquiring the asset, the amount by which the liability stood increased or
reduced during the previous year shall be added to or reduced from the actual
cost of the asset as defined in S. 43(1). This analysis indicated that during
the relevant assessment year adjustment to the actual cost was required to be
done each year on the closing date, i.e., year end. Subsequently, S. 43A
underwent a drastic change by virtue of a new S. 43A inserted vide the Finance
Act, 2002. Under the new S. 43A, such adjustment to the cost had to be done only
in the year in which actual payment is made. The Supreme Court noted that in
this case, it was not concerned with the position emerging after the Finance
Act, 2002. Under Explanation 3 to S. 43A, if the assesse had covered his
liability in foreign exchange by entering into forward contract with an
authorised dealer for the purchase of foreign exchange, the gain or loss arising
from such forward contract was required to be taken into account.

According to the assessee, S. 43A was not applicable in this
case as there was no increase or reduction in liability because such roll-over
charges were paid to avoid increase or reduction in liability consequent upon
change in the rate of exchange.

The Supreme Court held that during the relevant assessment years, S.
43A applied to the entire liability remaining outstanding at the year end, and
it was not restricted merely to the instalments actually paid during the year.
Therefore, at the relevant time, the year-end liability of the asessee had to
be looked into. Further, it could not be said that the roll-over charges had
nothing to do with the fluctuation in the rate of exchange. In the present
case, the notes to the accounts for the year ended December 31, 1986 (Schedule
17) indicated adverse fluctuations in the exchange rate in respect of
liabilities pertaining to the assets acquired. This note clearly established
the existence of adverse fluctuations in the exchange rate which made the
assessee opt for forward cover and which made the assessee pay the roll-over
charges. The word ‘adverse’ in the note itself pre-supposes increase in the
liability incurred by the assessee during the year ending December 31, 1986. In
the circumstances, the Supreme Court found no merit in the contention of the
assessee that roll-over charges had nothing to do with the fluctuation in the
rate of exchange.

 

According to the Supreme Court, roll-over
charges represented the difference arising on account of change in foreign
exchange rates. The Supreme Court therefore held that roll-over charges
paid/received in respect of liabilities relating to the acquisition of fixed
assets should be debited/credited to the asset in respect of which liability
was incurred. However, roll-over charges not relating to fixed assets should be
charged to the profit and loss account.

Charitable Trust — For claiming benefit u/s.11(1)(a), registration u/s.12A is a condition precedent.

New Page 2

7 Charitable Trust — For claiming benefit
u/s.11(1)(a), registration u/s.12A is a condition precedent.


[U.P. Forest Corporation & Anr. v. Dy. CIT, (2008) 297
ITR 1 (SC)]

The U.P. Forest Corporation, the appellant, was constituted
by a Notification issued u/s.3 of the U.P. Forest Corporation Act, 1974. In the
year 1977, the Income-tax authorities issued a notice to the corporation to file
its return of income for the A.Y. 1976-77. The corporation challenged the said
notice by filing writ petition which was disposed of by the High Court by
holding that the corporation was a local authority u/s.10(20) of the Act and was
entitled to claim exemption. Since the said order was not challenged by the
Revenue, the same became final and remained in force till a contrary view was
taken by the Supreme Court in respect of the A.Ys. 1977-78, 1980-81 and 1984-85
in the case of CIT v. U.P. Forest Corporation, reported in (1998) 230 ITR
945.

 

For the A.Y. 1977-78, the corporation’s income was assessed
by making some additions of income and deleting some deductions claimed in the
return of income. On an appeal being filed, the Commissioner (Appeals) upheld
that the corporation was exempt from paying tax, on the ground that it was a
‘local authority’ within the meaning of S. 10(20) of the Act. Insofar as the
relief sought regarding additions of income and deleting of deductions is
concerned, the Commissioner declined to decide the said issue. The Tribunal set
aside the said order of the Commissioner (Appeals) and held that the corporation
was not a ‘local authority’ and remanded the appeals to the Commissioner
(Appeals) for rehearing on the merits on the issue of grant of relief relating
to additions/deductions. Since the corporation was also assessed for the A.Y.
1984-85 as was assessed for the A.Y. 1977-78, the corporation preferred writ
petition before the High Court of Allahabad which was accepted, and the High
Court declared that the corporation was a ‘local authority’ and was entitled to
exemption u/s.10(20) of the Act. It was held that it was entitled to exemption
u/s.11(1)(a) of the Act being a charitable institution.

 

Aggrieved by the said order, the Department chose to file
special leave petition before the Supreme Court, wherein leave was granted and
ultimately the appeals were accepted and order passed by the High Court was set
aside. It was held that even though S. 3(3) of the U.P. Forest Corporation Act
regards the corporation as being a local authority for the purpose of the Act,
it would not, in law, make the corporation a local authority for the purpose of
S. 10(20) of the Act. On the question whether the corporation was to get itself
registered u/s.12A of the Act for invoking the provisions of S. 11(1)(a) of the
Act to claim exemption being a charitable institution, it was held that since
the question had not been raised before any of the authorities below, the High
Court should have remanded the case back to either the assessing authority or
the Tribunal for a decision. The Supreme Court, under the peculiar facts and
circumstances of the case, directed the assessing authority to consider the
claim of the appellant-corporation as to whether the appellant was not liable to
be taxed in view of the provisions of S. 11(1)(a) of the Act as a charitable
institution.

 

In the meantime, following the decision of the High Court in
W.P., the Commissioner (Appeals) allowed the appeals of the corporation in
respect of the A.Ys. 1977-78 and 1980-81 allowing exemption u/s.10(20) and S.
11(1)(a) of the Act.

 

The appellant-corporation, on July 11, 1988, moved an
application before the competent authority for being registered u/s.12A of the
Act, which was rejected after a gap of nine years on March 18, 1997.

Against the said rejection, the corporation filed writ
petition before the High Court during the pendency of which the corporation
filed another application for the purpose on May 4, 1998. The High Court allowed
the writ petition and set aside the order of the competent authority rejecting
the application of the corporation for registration, on the ground that the
Commissioner had passed an order in violation of the principles of natural
justice inasmuch as the appellant-corporation had not been given an opportunity
of hearing and directed the Commissioner to redecide the corporation’s
application for registration after giving an opportunity of hearing to the
corporation. The Commissioner decided against the corporation against which
order an appeal filed by the corporation before the Tribunal at Lucknow is
pending decision.

 

After the matter was remanded by the Supreme Court in the
case of CIT v. U.P. Forest Corporation, (1998) 3 SCC 530, the assessing
authority held that the appellant was not a charitable institution and assessed
the income in respect of the A.Ys. 1977-78, 1980-81 and 1984-85 to tax. The
Commissioner (Appeals) partly allowed the appeals of the appellant-corporation
granting some relief on issues of additions/deductions. The
appellant-corporation as also the Revenue filed appeals against the said order
before the Tribunal. The Tribunal allowed the appeals filed by the Revenue and
set aside the relief granted to the corporation on the issue of
additions/deductions, on the ground that this Court had remanded the matter only
to decide one issue. Being aggrieved, the corporation filed an appeal u/s.260A
of the Act before the High Court. The High Court remanded the matter to the
Tribunal for considering the matter afresh. Aggrieved by the said order, the
corporation filed appeal before the Supreme Court. The Revenue also filed an
appeal against the said order. The Revenue also challenged a subsequent order
passed by the High Court, wherein the above question had not been decided in
view of the pendency of the aforementioned appeals. The Supreme Court held that
for claiming benefit u/s.11(1)(a), registration u/s.12A is a condition
precedent. Unless and until an institution is registered u/s.12A of the Act, it
cannot claim the benefit of S. 11(1)(a) of the Act. Keeping in view the fact
that the appellant-corporation had not been granted registration u/s.12A of the
Act, it was held that the appellant was not entitled to claim exemption from
payment of tax u/s.11(1)(a) and u/s.12 of the Act. The Supreme Court dismissed
the appeals filed by the corporation without deciding the merits of the dispute.
In view of the dismissal of these appeals, the appeals filed by the Revenue were
also dismissed. However, in order to protect the interest of the assessee as
well as the Revenue, the Tribunal was directed to take up the matter on priority
basis and decide the same as expeditiously as possible without being influenced
by any of the findings recorded by the High Court in its order.

National Tax Tribunal — Petitions to be heard after the amendments in the provisions of the Act were made.

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15 National Tax Tribunal — Petitions to be heard after the
amendments in the provisions of the Act were made.


[Sandeep Goyal v. UOI, (2008) 298 ITR 10 (SC)]

The Supreme Court noted the various provisions which were
under challenge in the petitions filed and the contents of the affidavit filed
by the Union of India stating that it would make appropriate amendments in the
Act in this regard. The Supreme Court was of the view that it would be proper to
examine the matter after such amendments as the Government may think appropriate
are made. Liberty was granted to mention the matter for listing after the
amendments in the provisions were made.

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Diversion overriding title — Whether the payment of citizen tax payable to the employees who were Japanese citizens constituted an overriding charge on the salary and therefore would not be income of such employees and consequently no tax was to be deduct

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23 Diversion overriding title — Whether the payment of
citizen tax payable to the employees who were Japanese citizens constituted an
overriding charge on the salary and therefore would not be income of such
employees and consequently no tax was to be deducted at source — Matter remanded
to the Tribunal.

The assessee, a Japanese organisation set up for transmission
of news and broadcasting, paid salary to its employees. It also paid some
housing allowance.

The Assessing Officer included citizens tax as a part of the
income of the expatriates employed by the assessee-company in India as part of
the employee’s income on the ground that it was an amount paid by the assessee
to its employees. According to the Assessing Officer, the assessee ought to have
deducted tax at source at the time of payment.

On appeal, the Commissioner of Income-tax (Appeals) held that
citizen tax was a statutory levy in Japan on the Japanese citizens and such tax
constituted an overriding charge on the salary income and, therefore, the same
had to be excluded in computation of taxable income. This view of the
Commissioner (Appeals) was upheld by the Tribunal.

The High Court took the view that in view of the concurrent
finding of fact, no interference was called for and the appeal was dismissed
accordingly.

The Supreme Court was however of the view that the
Commissioner of Income-tax (Appeals) ought to have examined the provisions of
the Citizen Individual Inhabitant Tax Act which was a Japanese law and it ought
to have analysed the provisions of that law, particularly when it was required
to decide the question as to the nature of the levy being an overriding charge
on the salary income, as stated hereinabove. The controversy in the present case
was that whether citizens tax was a statutory levy in Japan on the Japanese
citizens constituting an overriding charge. If it was an overriding charge, then
of course the Commissioner of Income-tax (Appeals) was right in saying that it
would not be an income. However, according to the Supreme Court, since the
provisions of the Act had not been examined, the matter needed to be considered
afresh by the Tribunal. Accordingly, the Supreme Court remitted the matter to
the Tribunal for fresh consideration in accordance with law. The Supreme Court
did not express any opinion on the merits of the case.

[CIT v. NHK Japan Broadcasting Corporation, (2010) 322
ITR 628 (SC)]

 

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Heads of income — Business income or income from other sources — Interest on short-term deposits with bank of surplus fund — Income from other sources — No deduction u/s.80P is allowable as it is not a part of operational income.

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 22 Heads of income — Business income or income from other
sources — Interest on short-term deposits with bank of surplus fund — Income
from other sources — No deduction u/s.80P is allowable as it is not a part of
operational income.

The assessee, a co-operative credit society, which provides
credit facilities to its members and also markets the agricultural product of
its members, during the relevant assessment years in question, had surplus funds
which it invested in short-term deposits with banks and in Government
securities. Interest accrued to the assessee on such investments.

The Assessing Officer held that the interest income which the
assessee had disclosed under the head ‘Income from business’ was liable to be
taxed under the head ‘Income from other sources’. According to the Assessing
Officer the assessee-society had invested the surplus funds as and by way of
investment by an ordinary investor, hence, interest on such investment has got
to be taxed under the head ‘Income from other sources’. Before the Assessing
Officer, it was argued by the assesssee that it had invested the funds on
short-term basis as the funds were not required immediately for business
purposes and, consequently, such act of investment constituted a business
activity by a prudent businessman; therefore, such interest income was liable to
be taxed u/s.28 and not u/s.56 of the Act, and, consequently, the assessee was
entitled to deduction u/s.80P(2)(a)(i) of the Act. This argument was rejected by
the Assessing Officer as also by the Tribunal and the High Court, hence, the
civil appeal was filed by the assessee before the Supreme Court.

The Supreme Court held that the assessee-society regularly
invested funds not immediately required for business purposes. Interest on such
investments, therefore, could not fall within the meaning of the expression
‘profits and gains of business’. Such interest income cannot be said also to be
attributable to the activities of the society, namely, carrying on the business
of providing credit facilities to its members or marketing of the agricultural
produce of its members. The Supreme Court was of the view that such interest
income would come in the category of ‘Income from other sources’, hence, such
interest income would be taxed u/s.56 of the Act.

The Supreme Court further held that to say that the source of
income is not relevant for deciding the applicability of S. 80P of the Act would
not be correct because weightage need to be given to the words ‘the whole of the
amount of profits and gains of business’ attributable to one of the activities
specified in S. 80P(2)(a) of the Act. The words ‘the whole of the amount of
profits and gains of business’ emphasise that the income in respect of which
deduction is sought must constitute the operational income and not the other
income which accrues to the society. In this particular case, the evidence
showed that the assessee-society earned interest on funds which were not
required for business purposes at the given point of time. Therefore, on the
facts and circumstances of this case, the Supreme Court was of the view, such
interest income fell in the category of ‘Other Income’ which had been rightly
taxed by the Department u/s.56 of the Act.


[Totgar’s Co-operative Sale Society Ltd. v. ITO, (2010)
322 ITR 283 (SC)]

 

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Head of income — Business income or income from other sources — Interest on short-term deposits with bank — In the absence of factual matrix, matter remanded to the Tribunal for fresh adjudication.

New Page 1

21 Head of income — Business income or income from other
sources — Interest on short-term deposits with bank — In the absence of factual
matrix, matter remanded to the Tribunal for fresh adjudication.


The assessee was an exporter. The Tribunal held that the
interest income was generated by way of keeping the ‘advances’ received by the
assessee in the course of its regular business activity. According to the
Department, it was the case of surplus being invested in FDR, whereas according
to the assessee it was the case of advance having been received from the
exporter which was in FDR for short duration.

The Supreme Court observed that in the present case there was
no factual data to decide the aforesaid issue. The nature of the receipt was not
discussed. The High Court while disposing of the matter had also not examined
the factual basis. In view of the absence of factual matrix the Supreme Court
was of the view that to decide the question as to whether the receipt fell
u/s.28 or u/s.56, the matter was required to be remitted to the Tribunal for
fresh consideration in accordance with law.

[CIT v. Producin Pvt. Ltd., (2010) 322 ITR 270 (SC)]

 

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Business expenditure — Interest on borrowings — Assessee has to establish, in the first instance, its right to claim deduction under one of the Sections between S. 30 to S. 38, and in the case of a firm if it claims special deduction, it has also to prove

New Page 1

18 Business expenditure — Interest on
borrowings — Assessee has to establish, in the first instance, its right to
claim deduction under one of the Sections between S. 30 to S. 38, and in the
case of a firm if it claims special deduction, it has also to prove that it is
not disentitled to claim deduction by reason of applicability of S. 40(b)(iv).


[Munjal Sales Corporation v. CIT, (2008) 298 ITR 298
(SC)]

In August/September, 1991, the appellant-assessee granted
interest-free advances to its sister concerns, which were disallowed by the
Department on the ground that the said advances were not given from the firm’s
own funds but from interest-bearing loans taken by the assessee-firm from third
parties. Accordingly, the assessee’s claim for deduction u/s. 36(1)(iii) was
disallowed by the Department for the A.Y. 1992-93. However, the Tribunal deleted
the disallowance saying that the assessee had given such advance from its own
funds. In the next A.Y. 1993-94 , the same situation look place. During the A.Y.
1994-95, no further advances were made by the assessee-firm in favour of its
concerns. However, during the A.Y. 1995-96, a small interest-free loan of Rs.5
lakhs was advanced by the assessee-firm to its sister concern and during the
year in question, the assessee had profits of Rs.1.91 crores. The said
advance/loan got finally repaid in the A.Y. 1997-98. For the A.Y. 1994-95, the
Department disallowed the claim for deduction u/s.40(b)(iv) saying that in this
case there was diversion of funds by raising of interest-free loans. The
Assessing Officer did not accept the submission of the assessee that advance(s)
made by the assessee were out of the income of the firm. According to the
Assessing Officer, the said interest-free advances to sister concerns were out
of monies borrowed by the firm from third parties on payment of interest, hence
the assessee was not entitled to deduction u/s.40(b) of the 1961 Act. This view
was confirmed by the Tribunal. For the A.Ys. 1995-96 and 1996-97, the Tribunal
held that during the said years, no interest-free advances to sister concerns
were made and, therefore, there was no nexus between ‘interest-bearing loans’
taken and ‘interest-free advances’. However, the Tribunal found that there was
no material to show that advances were made to sister concerns out of the firm’s
own income and, therefore, the assessee was not entitled to deduction
u/s.40(b)(iv) of the 1961 Act. The Supreme Court after analysing the scheme of
the Act and in particular the provision of S. 36(1)(iii) and S. 40(b), held that
every assessee, including a firm, has to establish, in the first instance, its
right to claim deduction under one of the Sections between S. 30 to S. 38 and in
the case of the firm, if it claims special deduction, it has also to prove that
it is not disentitled to claim deduction by reason of applicability of S.
40(b)(iv). The Supreme Court on the facts held that for the A.Y. 1992-93 and the
A.Y. 1993-94, the Tribunal held that the loans given to the sister concerns were
out of the firm’s funds and that were advanced for business purposes. Once it is
found that the loans granted in August/September, 1991 continued up to A.Y.
1997-98 and that the said loans were advanced for business purposes and that
interest paid thereon did not exceed 18/12 per cent per annum, the assessee was
entitled to deductions u/s.36(1)(iii) read with S. 40(b)(iv) of the 1961 Act.
Further, the Supreme Court observed that during A.Y. 1995-96, apart from the
loan given in August/September, 1991, the assessee advanced interest-free loan
to its sister concern amounting to Rs. 5 lakhs. According to the Tribunal, there
was nothing on record to show that the loans were given to the sister concern by
the assessee-firm out of its own funds and, therefore, it was not entitled to
claim deduction u/s.36(1)(iii). The Supreme Court held that finding of the
Tribunal was thus erroneous. The opening balance as on April 1, 1994, was
Rs.1.91 crores, whereas the loan given to the sister concern was a small amount
of Rs.5 lakhs. According to the Supreme Court, the profits earned by the
assessee during the relevant year were sufficient to cover the impugned loan of
Rs.5 lakhs. The Supreme Court accordingly allowed the appeal.

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Assessment — Prima facie adjustments — When there are conflicting judgments or interpretations of a Section, prima facie adjustment contemplated u/s.143(1)(a) was not applicable and in such cases there was no liability to pay additional tax u/s.143(1A).

New Page 17 Assessment — Prima facie adjustments — When
there are conflicting judgments or interpretations of a Section, prima facie
adjustment contemplated u/s.143(1)(a) was not applicable and in such cases
there was no liability to pay additional tax u/s.143(1A).

[Kvaverner John Brown Engg. (India) P. Ltd. v.
ACIT, (2008) 305 ITR 103 (SC)]

During the relevant assessment years, the
appellant claimed deduction u/s.80-0 in respect of qualifying income brought
into India in convertible foreign exchange. In its return, the appellant
indicated the qualifying income as the gross figure. By way of adjustment
u/s.143(1)(a), the Income-tax Officer restricted the qualifying income to the
net figure. In other words, the assessee claimed the gross income earned in
foreign exchange as the qualifying income, whereas the Income-tax Officer
granted deduction by restricting the claim of the assessee to the net income.

On December 17, 1997, whether the eligible income
should be taken at the gross figure or net figure, was the question for
interpretation. There were several conflicting decisions on this point.
Therefore, according to the appellant, S. 143(1)(a) was not applicable and
consequently the appellant was not liable to pay the additional tax
u/s.143(1A).

The Supreme Court observed that the only point
raised by the appellant was that it was not liable to pay additional tax, as
S. 143(1)(a), as it stood during the relevant year, was not applicable to the
facts of this case, because a moot point had arisen which could not have been
a matter for adjustment under that Section and which point needed
consideration and determination only under regular assessment vide S. 143(3)
of the 1961 Act. The Supreme Court held that for the A.Ys. 1996-97 and 1997-98
with which it was concerned, one of the main conditions stipulated by way of
the first proviso to S. 143(1)(a), as it stood during the relevant time,
referred to prima facie adjustments. The first proviso permitted the
Department to make adjustments in the income or loss declared in the return in
cases of mathematical errors or in case where any loss carried forward or
deduction or allowance which on the basis of information available in return
was prima facie admissible, but which was not claimed in the return or
in cases where any loss carried forward or deduction or allowance claimed in
the return which on the basis of information available in the return, was
prima facie inadmissible. In the present case, therefore, when there were
conflicting judgments on interpretation of S. 80-0, the Supreme Court was of
the view that prima facie adjustments contemplated u/s.143(1)(a) were
not applicable and therefore the appellant was not liable to pay additional
tax u/s.143(1A) of the Act.

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Method of Accounting — Chit fund — Chit discount accounting on completed contract method cannot be rejected, especially when it is revenue neutral.

New Page 1

16 Method of Accounting — Chit fund — Chit
discount accounting on completed contract method cannot be rejected, especially
when it is revenue neutral.


[CIT v. Bilahari Investment P. Ltd., (2008) 299 ITR I
(SC)]

The assessees are private limited companies subscribing to
chits as their business activities. They were maintaining their accounts on the
mercantile basis and they were computing profit/loss, as the case may be, at the
end of the chit period following the completed contract method, which was
earlier accepted by the Department over several years.

 

However, for the A.Ys. 1991-92 to 1997-98, the Assessing
Officer came to the conclusion that the completed contract method was not
accurate in recognising/identifying ‘income’ under the 1961 Act, and according
to him, therefore, in the context of the ‘chit discount’, the correct method was
deferred revenue expenditure calculated on proportionate basis. In other words,
the Assessing Officer has preferred the percentage of completion method as the
basis for recognising/identifying ‘income’ under the 1961 Act in substitution of
the completed contract method.

 

According to the Department, chit dividend had to be
subjected to tax on accrual basis as the assessees were following the mercantile
system of accounting. As far as the chit dividend is concerned, the Department
rejected the completed contract method as suggested by the assessees, which has
been accepted by the Tribunal and the High Court. However, in the matter of chit
discount, the High Court, overruling the Tribunal, has held that the completed
contract method of accounting adopted by the assessees was valid and that the
Department had erred in spreading the discount over the remaining period of the
chit on proportionate basis. In the matter of chit dividend, the assessees
accepted the view of the Tribunal and the High Court that the completed contract
method was not correct.

 

Before the Supreme Court the limited controversy was whether
the completed contract method of accounting adopted by the assessees as method
of accounting for chit discount was required to be substituted by the percentage
of completion method.

 

The Supreme Court noted that chit funds are basically saving
schemes in which a certain number of subscribers join together and each
contributes a certain fixed sum each month, the total number of months being
equal to the total number of subscribers. The subscriptions are paid to the
manager of the fund by a certain prescribed date each month and the total
subscriptions to the fund are auctioned each month amongst the subscribers. At
each auction, the lowest bidder is paid the amount of his bid and the balance
received from out of the total subscriptions received is distributed equally
amongst other subscribers, as premium. The manager is paid a certain percentage
of the collections each month on account of expenses and charges for conducting
the auction. In the auction, a maximum amount, which the highest bidder agrees
to forgo, is the amount which is distributed to the other members, subject to
deduction of the manager’s commission.

 

Before the Supreme Court, it was the case of the assessees
that profits (loss) accrued to the assessees only when the dividends exceeded
the discount paid and that the difference could be known only on the termination
of the chit when the total figure of dividend received and discount paid would
be available. That, it would be possible for the assessees to make profits only
when the sum total of the dividend received exceeded the sum total of discounts
suffered which is debited to the profit and loss account. According to the
assessees, the Department has all along been accepting the completed contract
method and, therefore, there was no justification in law or in facts for
deviating from the accepted practice. According to the assessees, a chit
transaction has been treated by the various Courts as one single scheme running
for the full period and, therefore, according to the assessees, the completed
contract method adopted by it over the years was not required to be substituted
by any other method of accounting.

 

The Supreme Court observed that recognition/identification of
income under the 1961 Act is attainable by several methods of accounting. It may
be noted that the same result could be attained by any one of the accounting
methods. The completed contract method is one such method. Similarly, the
percentage of completion method is another such method. Under the completed
contract method, the revenue is not recognised until the contract is complete.
Under the said method, costs are accumulated during the course of the contract.
The profit and loss is established in the last accounting period and transferred
to the profit and loss account. The said method determines results only when the
contract is completed.

 

On the other hand, the percentage of completion method tries
to attain periodic recognition of income in order to reflect current
performance. The amount of revenue recognised under this method is determined by
reference to the stage of completion of the contract. The stage of completion
can be looked at under this method by taking into consideration the proportion
that costs incurred to date bears to the estimated total costs of contract.

 

The Supreme Court held that it was concerned with the A.Ys.
1991-92 to 1997-98. In the past, the Department had accepted the completed
contract method and because of such acceptance, the assessees, in these cases,
had followed the same method of accounting, particularly in the context of chit
discount. Every assessee is entitled to arrange its affairs and follow the
method of accounting, which the Department has earlier accepted. It is only in
those cases where the Department records a finding that the method adopted by
the assessee results in distortion of profits, the Department can insist on
substitution of the existing method.

 

Further, in the present cases, the Supreme Court noted from
the various statements produced before them that the entire exercise, arising
out of change of method from the completed contract method to deferred revenue
expenditure, is revenue-neutral. Therefore, the Supreme Court did not wish to
interfere with the impugned judgment of the High Court.

 

Appeal to the High Court — Finding of facts recorded by the Tribunal that machinery was not idle for the entire block period — hence it was not necessary to go into the connotation of the word ‘used’ appearing in S. 32 of the Act.

New Page 1

6 Appeal to the High Court — Finding of facts
recorded by the Tribunal that machinery was not idle for the entire block period
— hence it was not necessary to go into the connotation of the word ‘used’
appearing in S. 32 of the Act.

[Dy. CIT v. N. K. Industries Ltd., (2008)
305 ITR 274 (SC)]

The Supreme Court was concerned with the block
period April 1, 1988, to February 24, 1999. The main contention advanced on
behalf of the Department was that for allowance of deduction for depreciation,
the asset must not only be owned by the assessee but it must also be used for
the purposes of business or profession of the assessee. It was the case of the
Department that the word ‘used’ in S. 32 of the Income-tax Act, 1961, refers to
actual use of the asset; that having regard to the scheme of the Income-tax Act,
1961, and particularly, after the introduction of the concept of ‘block of
assets’, actual use is the only requirement apart from ownership for allowance
of depreciation u/s.32. It was also the case of the Department that an important
question of law arose for determination before the High Court; that the High
Court has failed to examine the said question; and that it had erred in
dismissing the tax appeals only on the ground that no substantial question of
law had arisen.

The Supreme Court observed that in the present
case, the Tribunal had examined the statements of certain witnesses and after
analysing the material on record, it had come to the conclusion on facts that
there was nothing to show that the machinery, namely, expellers remained idle
for the entire block period April 1, 1988 to February 24, 1999. The Supreme
Court after having examined the record itself, agreed with the view expressed by
the Tribunal on the facts of the present case. The Supreme Court was of the view
that hence, it is not necessary for it to go into the larger question of law
regarding the connotation of the word ‘used’ appearing in S. 32 of the
Income-tax Act, 1961. The Supreme Court dismissed the appeal for the aforesaid
reasons. The question of law was however kept open.

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Depreciation — Higher depreciation could not be allowed on the motor trucks used in business of running them on hire, unless there is an evidence that the assessee was in the business of hiring out motor vehicles.

New Page 15 Depreciation — Higher depreciation could not
be allowed on the motor trucks used in business of running them on hire,
unless there is an evidence that the assessee was in the business of hiring
out motor vehicles.

[CIT v. Gupta Global Exim P. Ltd., (2008)
305 ITR 132 (SC)]

The Assessing Officer (AO) took the view that the
assesseé was, during the relevant assessment year, in the business of timber
trading and it was only occasionally that the trucks owned by the assessee
were given out on hire to outside parties and, hence, the assessee was not in
the business running the trucks on hire and, therefore, the assessee was not
entitled to claim higher rate of depreciation at 40%. This finding of the
Assessing Officer was reversed by the Commissioner of Income-tax (Appeals). It
was held by the Commissioner of Income-tax (Appeals) that the transportation
income of 12,50,639 by way of running the subject vehicles on hire was an
integral part of the assessee’s business and that its inclusion under the head
‘Business income’ was not disputed even by the Assessing Officer. This finding
of the Commissioner of Income-tax (Appeals) was affirmed by the Tribunal. The
High Court had refused to interfere on the ground that the matter involved
essentially questions of fact. On an appeal to the Supreme Court, it held that
generally, the Supreme Court does not interfere with the concurrent finding of
facts recorded by the authorities below. However, in this case, the Supreme
Court was of the opinion that a neat substantial question of law arose for
determination which needed interpretation of the depreciation table given in
Appendix I to the Income-tax Rules, 1962.

The Supreme Court held that under item (2)(ii) of
heading III, higher rate of depreciation is admissible on motor trucks used in
a business of running them on hire. Therefore, the user of the same in the
business of the assessee of transportation is the test.

According to the Supreme Court, in the present
case, none of the authorities below (except the Assessing Officer) had
examined the matter by applying the above test. The Assessing Officer had
given his finding that the assessee was not in the business of transportation
as he was only in the business of trading in timber logs. That, the burden was
on the assessee to establish that it is the owner of motor lorries and that it
used the said motor lorries/trucks in the business of running them on hire.

In the view of the Supreme Court, the entire
approach of the Commissioner of Income-tax (Appeals) was erroneous when he had
stated that the transportation income of Rs.12,50,639 by way of running the
subject vehicles on hire was an integral part of the appellant’s business and
its inclusion in the head ‘Business income’ is not disputed even by the AO.
According to the Supreme Court, mere inclusion of Rs.12,50,639 in the total
business income is not the determinative factor for deciding whether trucks
were used by the assessee during the relevant year in a business of running
them on hire. The Supreme Court therefore set aside the judgment of the High
Court and remitted the matter to the Commissioner of Income-tax (Appeals) for
de novo examination of the case in accordance with law.

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Business Expenditure — S. 42(1) — Special provisions for prospecting for mineral oil — Production sharing contract accounts is an independent accounting regime — Foreign exchange losses on account of foreign currency transaction is allowable as a deductio

New Page 14 Business Expenditure — S. 42(1) — Special
provisions for prospecting for mineral oil — Production sharing contract
accounts is an independent accounting regime — Foreign exchange losses on
account of foreign currency transaction is allowable as a deduction.

[CIT v. Enron Oil and Gas India Ltd.,
(2008) 305 ITR 75 (SC)]

The respondent-Enron Oil and Gas India Ltd. (‘the
EOGIL’), a company incorporated in Cayman Islands was engaged in the business
of oil exploration. In 1993, the Government of India through the Petroleum
Ministry invited bids for development of concessional blocks. EOGIL offered
its bid for the development of concessional blocks. A consortium of EOGIL with
RIL was given the contract. Later on, ONGC joined. EOGIL with RIL and ONGC
executed a production sharing contract (PSC) with the Government of India.
EOGIL was entitled to a participating interest of 30% in the rights and
obligations arising under the PSC. RIL was also entitled to participating
interest of 30%. ONGC was entitled to a participating interest of 40%. EOGIL
was designated as the operator under the said PSC.

Vide Notification No. 1997, dated March 8, 1996,
u/s.293A of the Income-tax Act, 1961 (‘the 1961 Act’), each co-venturer was
liable to be assessed for his own share of income. They were not to be treated
as an association of persons.

EOGIL filed its return of income for the
assessment year 1999-2000 declaring its taxable income of Rs. 71,19,50,013
u/s.115JA.

During the year, EOGIL debited its profit and
loss account by exchange loss of Rs.38,63,38,980. The Assessing Officer
disallowed this loss on the ground that it was a mere book entry and actually
no loss stood incurred by the assessee.

The decision of the Assessing Officer was
challenged in appeal by EOGIL before the Commissioner of Income-tax (Appeals),
who after analysing PSC held that each co-venturer in this case had made
contribution at a certain rate, whereas the expenditure incurred out of the
said contribution stood converted on the basis of the previous month’s average
daily means for the buying and selling rates of exchange which exercise
resulted in loss/profit on conversion. Under the circumstances, according to
the Commissioner of Income-tax (Appeals), it could not be said that the
assessee had incurred notional loss. In fact, during the course of
proceedings, the Commissioner of Income-tax (Appeals) found that during the
A.Ys. 1995-96 and 1996-97 the assessee had earned profits which stood taxed by
the Department. He further found that one co-venturer (ONGC) had gained
Rs.293.73 crores during the A.Y. 1997-98 because the Indian rupee had
appreciated as compared to foreign currency and the Department had taxed the
same, but when during the assessment year in question there is a loss on
account of such conversion, the Department has refused to allow the deduction
for such conversion losses. According to the Commissioner of Income-tax
(Appeals), the Department cannot blow hot and cold. Consequently, it was held
that just as the foreign exchange gain was taxable, loss was allowable
u/s.42(1) of the Income-tax Act in terms of the PSC. Therefore, the
Commissioner of Income-tax (Appeals) allowed as deduction, the loss of Rs.
38,63,38,980.

Aggrieved by the order passed by the Commissioner
of Income-tax (Appeals), the Department carried the matter in appeal to the
Income-tax Appellate Tribunal objecting to the deletion made by the
Commissioner of Income-tax (Appeals) on the ground that the loss was only a
book entry. Before the Tribunal the matter pertained to the A.Ys. 1999-2000,
199899, 2000-01 and 1996-97. However, for the sake of convenience, the
Tribunal focussed its attention on the facts and figures given for the A.Y.
1999-2000. Before the Tribunal, the Department contended that the assessee
borrows in USD and repays in the same currency for the preparation of the
balance sheet. The loans, according to the Department, were stated at
prevalent exchange rates and the loss arrived at was charged to the profit and
loss account. Therefore, according to the Department, the said loss was a book
entry and it was not an actual loss in foreign exchange caused to the assessee.
This argument of the Department was rejected by the Tribunal. It was held that
the assessee was a foreign company. It carried out business activity in India.
It had to maintain its accounts in rupees for the purpose of income-tax, that
the PSC had to be read with S. 42(1) of the Income-tax Act, which entitled the
assessee to claim conversion loss as deduction, particularly when the said PSC
provided for realised and unrealised gains/losses from the exchange currency.
According to the Tribunal, the assessee was maintaining its accounts in rupees
and such accounts had to reflect the loan liability under consideration as the
loan had been taken for the Indian activity. Therefore, according to the
Tribunal, the liability arising as a consequence of depreciation of the rupee
had to be considered both for accounting and tax purposes. Accordingly, the
Tribunal refused to interfere with the findings returned by the Commissioner
of Income-tax (Appeals).

The above concurrent finding stood confirmed by
the judgment delivered by the Uttarakhand High Court.

On further appeal, the Supreme Court observed
that the only question which needed consideration was whether the assessee was
entitled to claim deduction for foreign exchange losses on account of foreign
currency translation. In other words, whether loss arising on account of
foreign currency translation is allowable deduction or not and conversely
whether the gains on account of foreign currency translation is to be treated
as a receipt liable to tax. Analysing the provisions of S. 42(1), the Supreme
Court held that it was clear that the said Section was a special provision for
deductions in the case of business of prospecting, extraction/production of
mineral oils. S. 42(1) provides for admissibility in respect of three types of
allowances provided they are specified in the PSC. They relate to expenditure
incurred on account of abortive exploration, expenditure incurred before or
after the commencement of commercial production in respect of drilling or
exploration activities and expenses incurred in relation to depletion of
mineral oil in the mining area. If one reads S. 42(1) carefully, it becomes
clear that the above three allowances are admissible only if they are so
specified in the PSC.

Accordingly, the Supreme Court noted that the PSC
in question provided for both capital and revenue expenditures. It also
provided for a method in which the said expenses had to be accounted for. The
Supreme Court held that the said PSC was an independent accounting regime
which included tax treatment of costs, expenses, incomes, profits, etc. It
prescribed a separate rule of accounting. In normal accounting, in the case of fixed assets, generally when currency fluctuation results in an exchange loss, addition is made to the value of the asset for depreciation. However, under the PSC, instead of increasing the value of expenditure incurred on account of currency variation in the expenses itself, EOGIL was required to book losses separately. The said PSC prescribed a special manner of accounting which was at variance with the normal accountingstandards. The said ‘PSC accounting’ obliterated the difference between capital and revenue expenditure. It made all kinds of expenditure chargeable to the profit and loss account without reference to their capital or revenue nature. But for the PSC accounting there would have been disputes as to whetherthe expenses were of revenue or capital nature. In view of the special accounting procedure prescribed by the PSC, Accounting Standard 11 had to be ruled out.

The Supreme Court observed that Appendix C pre-scribed the manner in which a contractor is required to maintain his accounts. It stipulated that each of the co-venturers had to follow the computation of Income-tax under the 1961 Act. Clause 1.6.1. of appendix C referred to currency exchange rates. It stated that for translation purposes between USD and INR, the previous month’s average of the daily means of buying and selling rates of exchange as quoted by SBI shall be used for the month in which revenue, costs, expenditure, receipts or incomes are recorded. The Supreme Court therefore, held that clause 1.6.1 of appendix C provided for translation. The Supreme Court noted that subsequent to the award of the concession, EOGIL along with RIL and ONGC executed the PSC with the Government of India. Under the said PSC, each co-venturer remitted money, known as cash call to the bank account of the operator in the USA. The expenditure for the joint venture was made out of the said account. The trial balance was required to be prepared at the end of the month in USD, which was then required to be translated on the basis of accounting procedure mentioned in Appendix C to the PSC. The Supreme Court held that the cash call in other words was not a loan. Cash cali was a contribution. It was made by each co-venturer at a certain rate, whereas the expenditure against it had to be converted on the basis of the exchange rates as provided for in the PSC, which stated that the same had to be converted on the basis of the previous month’s average of the daily means of buying and selling rates of exchange. The above analysis showed that the capital contribution had to be converted under the PSC at one rate, whereas the expenditure had to be converted at a different rate. This exercise resulted in loss/ profit on conversion. Under the PSC, the respondent had to convert revenue, costs, receipts and incomes. If EOGIL had a choice to prepare its accounts only in USD, there would have been no loss/profit on account of currency translation. It is because of the specific provision in the PSC for currency translation that loss/profit accrued to EOGIL. The Supreme Court further held that in the PSC, the foreign company provides the capital investment and cost and the first proportion of oil extracted is generally allocated to the company which uses oil sales to recoup its costs and capital investment. The oil used for that purpose is termed ‘cost oil’. Often a company obtains profit not just from the ‘profit oil’, but also from the ‘cost oil’. Such profits cannot be ascertained without taking into account translation losses. Moreover, taxes are embedded in the profit oil. If these concepts are kept in mind, then it cannot be said that ‘translation losses’ under the PSC are illusory losses.

Appeal by the Revenue — Merely because in some cases the Revenue has not preferred appeal that does not operate as a bar for the Revenue to prefer an appeal in another case where there is a just cause.

New Page 12 Appeal by the Revenue — Merely because in
some cases the Revenue has not preferred appeal that does not operate as a bar
for the Revenue to prefer an appeal in another case where there is a just
cause.

[C. K. Gangadharan & Anr. v. CIT, (2008)
304 ITR 61 (SC)]

By order dated March 13, 2008, a reference was
made to a larger Bench of the Supreme Court and the order, of reference,
inter alia, read as follows :

”In view of the aforesaid position, we are of the
opinion that the matter requires consideration by a larger Bench to the extent
whether the Revenue can be precluded from defending itself by relying upon the
contrary decision.”

The Supreme Court made it clear that it was not
doubting the correctness of the view taken by it in the cases of Union of
India v. Kaumudini Narayan Dalal, (2001) 249 ITR 219, CIT v. Narendra
Doshi, (2002) 254 ITR 606 and CIT v. Shivsagar Estate, (2002) 257
ITR 59 to the effect that if the Revenue has not challenged the correctness of
the law laid down by the High Court and accepted it in the case of one
assessee, then it is not open to the Revenue to challenge its correctness in
the case of other assessees, without just cause. The Supreme Court after
noting its decisions in Bharat Sanchar Nigam Ltd. v. Union of India,
(2006) 282 ITR 273 (SC), State of Maharashtra v. Digambar, (1995) 4 SCC
683, Government of West Bengal v. Tarun K. Roy, (2004) 1 SCC 347,
State of Bihar Ramdeo Yadav, (1996) 3 SCC 493 and State of West Bengal
v. Devdas Kumar, (1991) Supp (1) SCC 138, observed that if the assessee
takes the stand that the Revenue acted mala fide in not preferring
appeal in one case and filing the appeal in other case, it has to establish
mala fides. The Supreme Court accepted the contention of the learned
counsel for the Revenue that there may be certain cases where because of the
small amount of revenue involved, no appeal is filed or where policy decisions
have been taken not to prefer appeal where the revenue involved is below a
certain amount. Similarly, where the effect of the decision is revenue
neutral, there may not be any need for preferring the appeal. All these
provide the foundation for making a departure.

The Supreme Court held that merely because in
some cases the Revenue has not preferred appeal that does not operate as a bar
for the Revenue to prefer an appeal in another case where there is just cause
for doing so or it is in public interest to do so or for a pronouncement by
the higher court when divergent views are expressed by the Tribunals or the
High Courts.

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Exemption — Local Authority — Marketing Committee to provide facilities for marketing of agricultural produce in a locality is not a ‘local authority’ and there fore its income is not exempt u/s.10(20) (after amendment by Finance Act, 2002). Its income is

New Page 13 Exemption — Local Authority — Marketing
Committee to provide facilities for marketing of agricultural produce in a
locality is not a ‘local authority’ and there fore its income is not exempt
u/s.10(20) (after amendment by Finance Act, 2002). Its income is exempt
u/s.10(26AAB) from 1-4-2009.

[Agricultural Produce Market Committee,
Narela v. CIT & Anr., (2008) 305 ITR 1 (SC)]

The appellant-Committee was established under
the Delhi Agricultural Produce Marketing (Regulation) Act, 1998 (the 1998
Act). The provisions of the said 1998 Act enjoined upon the appellant to
provide facilities for marketing of agricultural produce in Narela, Delhi.
This is apart from performing other functions and duties such as
superintendence, direction and control of markets for regulating the
marketing of agricultural produce.

For the A.Y. 2003-04, the appellant-Committee
claimed exemption from payment of tax on the income earned by it, on the
ground that it was a ‘local authority’ within the meaning of S. 10(20) of
the Income-tax Act, 1961 (the 1961 Act). It relied upon the definition of
‘local authority’ in S. 2(1)(l) of the said 1998 Act. The Assessing Officer
rejected the appellant’s claim for exemption relying upon Circular No.
8/2002, dated August 27, 2002 issued by the Central Board of Direct Taxes.
The view taken was that the amended provisions of S. 10(20) of the 1961 Act
were not attracted to ‘Agricultural Produce Marketing Societies’ or
‘Agricultural Market Boards’ even when they may be local authorities under
the Central or State legislation.

Aggrieved by the said order, the appellant
filed an appeal before the Commissioner of Income-tax (Appeals) who upheld
the view taken by the Assessing Officer and declined the exemption claimed
by the appellant.

A further appeal by the appellant, before the
Tribunal, also failed.

Aggrieved by the decision of the Tribunal, the
appellant moved the High Court by way of an appeal u/s.260A of the 1961 Act.
The Delhi High Court following its earlier judgment in the case of
Agricultural Produce Market Committee, Azadpur v. CIT, (ITA No.
749/2006), dismissed the appellant’s appeal.

On further appeal, the Supreme Court noted that
prior to the Finance Act, 2002, the said 1961 Act did not contain the
definition of the words ‘local authority’. Those words came to be defined
for the first time by the Finance Act, 2002, vide the Explanation/
definition clause.

After hearing the parties, the Supreme Court
observed that u/s.3(31) of the General Clauses Act, 1897, ‘local authority’
was defined to mean “a municipal committee, district board, body of port
commissioners or other authority legally entitled to the control or
management of a municipal or local fund. The words ‘other authority’ in S.
3(31) of the 1897 Act have been omitted by Parliament in the
Explanation/definition clause inserted in S. 10(20) of the 1961 Act, vide
the Finance Act, 2002. Therefore, it was not correct to say that the entire
definition of the words ‘local authority’ was bodily lifted from S. 3(31) of
the 1897 Act and incorporated by Parliament, in the Explanation to S. 10(20)
of the 1961 Act. This deliberate omission was important. The Supreme Court
noted that various High Courts had taken the view prior to the Finance Act,
2002, that AMC(s) is a ‘local authority’. That was because there was no
definition of the words ‘local authority’ in the 1961 Act. Those judgments
proceeded primarily on the functional tests as laid down in the judgment of
the Supreme Court in the case of R. C. Jain [(1981) 2 SCC 308].

In the case of R. C. Jain, the test of ‘like
nature’ was adopted as the words ‘other authority’ came after the words
‘Municipal Committee, District Board, Body of Port Commissioners’.
Therefore, the words ‘other authority’ in S. 3(31) took colour from the
earlier words, namely, ‘Municipal Committee, District Board or Body of Port
Commissioners’. This is how the functional test was evolved in the case of

R. C. Jain. The Supreme Court held that
Parliament in its legislative wisdom had omitted the words ‘other authority’
from the said Explanation to S. 10(20) of the 1961 Act. The said Explanation
to S. 10(20) provides a definition to the words ‘local authority’. It is an
exhaustive definition. It is not an inclusive definition. The words ‘other
authority’ do not find place in the said Explanation. Even according to the
appellant(s), AMC(s) was neither a Municipal Committee nor a District Board
nor a Municipal Committee nor a Panchayat. Therefore, according to the
Supreme Court, the functional test and the test of incorporation as laid
down in the case of R. C. Jain, was no more applicable to the Explanation to
S. 10(20) of the 1961 Act.

However, the Supreme Court felt that the
question still remained as to why Parliament had used the words ‘Municipal
Committee’ and ‘District Board’ in item (iii) of the said Explanation.
According to the Supreme Court, Parliament defined ‘local authority’ to mean
— a panchayat as referred to in clause (d) of Article 243 of the
Constitution of India, Municipality as referred to in clause (e) of Article
243P of the Constitution of India. However, there was no reference to
Article 243 after the words ‘Municipal Committee’ and ‘District Board’. It
appeared that the Municipal Committee and District Board in the said
Explanation were used out of abundant caution. In 1897 when the General
Clauses Act was enacted there existed in India, Municipal Committees and
District Boards and it was quite possible that in some remote place a
District Board still existed. The Supreme Court in conclusion observed that
having taken the view that AMC(s) is neither a Municipal Committee nor a
District Board under the Explanation to S. 10(20) of the Act, it refrained
from going into the question : whether the AMC(s) is legally entitled to the
control of the local fund, namely, Market Fund, under said 1998 Act, because
vide the Finance Act, 2008, income of AMC(s) is exempted under sub-section
(26AAB) of S. 10 with effect from April 1, 2009.

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Capital or revenue expenditure — Development and prospecting expenditure — The question is to be considered in the light of the provisions of S. 35E(2) and not in the context of S. 37(1).

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  1. Capital or revenue
    expenditure — Development and prospecting expenditure — The question is to
    be considered in the light of the provisions of S. 35E(2) and not in the
    context of S. 37(1).

[Rajasthan State Mines
and Minerals Ltd. v. CIT, (2009) 313 ITR 366 (SC)

In the assessment orders
passed for the A.Ys. 1998-99 and 1999-2000 in the case of the assessee, a
public sector undertaking of the Government of Rajasthan, the Assessing
Officer disallowed the expenditure towards developments and prospecting
charges treating it as capital in nature. The Commissioner of Income-tax
(Appeals) referred to the provisions of S. 35E(2) which provide that any
expenditure incurred wholly and exclusively on any operation relating to
prospecting for any mineral or on development of a mine in the year of
commercial production and any one or more of the four years immediately
preceding that year shall be allowed as deduction equal to one tenth of the
amount of expenditure starting from the year the assessee is specifically
covered u/s.35E(2). The Commissioner of Income-tax (Appeals) observed that
the assessee had claimed write off over a period of time and therefore the
claim should be more. It appears that Commissioner of Income-tax (Appeals)
had upheld the disallowance for the reason that prospecting expenses were
incurred on expenditure of corporate plan which did not pertain to
prospecting expenses. Before the Tribunal it was contended by the assessee
that this expenditure was incurred for orientation of the administrative set
up and this was revenue in nature, whereas, the Departmental Representative
had contended that this expenditure was of capital nature because corporate
plan expenditure was of enduring benefit to the assessee company. It appears
that Tribunal rejected the assessee’s appeal. On a further appeal, the High
Court, also appears to have rejected the appeal of the assessee with
reference to the provisions of S. 37(1) of the Act. The Supreme Court, on
assessee’s appeal, observed that it could not be disputed that, had the High
Court considered the claim of the appellant in the light of S. 35E(2), it
might have arrived at a different conclusion. The Supreme Court, therefore,
set aside the judgment of the High Court and remitted the matter back to the
High Court for considering the assessee’s appeal afresh on merits.



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Business expenditure — Whether aid given to the residents living in the vicinity of the factory of the assessee is a business expenditure allowable u/s.37 of the Act is a question on which finding of fact should be given by the Tribunal.

New Page 1

  1. Business expenditure — Whether
    aid given to the residents living in the vicinity of the factory of the
    assessee is a business expenditure allowable u/s.37 of the Act is a question
    on which finding of fact should be given by the Tribunal.

[CIT v. Madras Refineries
Ltd., (2009) 313 ITR 334 (SC)]

During the previous year
relevant to the A.Y. 1993-94, the assessee’s claim with respect to social and
welfare community expenses was disallowed by the Assessing Officer. Aggrieved
by the said order, the assessee filed an appeal before the Commissioner of
Income-tax (Appeals), who allowed the appeal deleting the disallowance.
Against the said order, the Revenue preferred an appeal before the Income-tax
Appellate Tribunal, which dismissed the appeal.

Further on an appeal,
following the decisions in CIT v. Madras Refineries Ltd., (2004) 266
ITR 170 and Cheran Engineering Corporation Ltd. v. CIT, (1999) 238 ITR
892, the Madras High Court held that the social and welfare community expenses
were deductible as business expenditure.

On an appeal before the
Supreme Court by the Revenue, it was argued on behalf of the assessee that the
aid given to the residents living in the vicinity of the factory of the
assessees was a business expenditure allowable u/s.37 of the Income-tax Act.
The Supreme Court, however, did not find any finding on this aspect in the
judgment of the Tribunal as well as in the judgment of the High Court and
therefore, set aside the impugned judgment of the High Court and remitted the
matter to the Tribunal for de novo examination of this point in
accordance with law.

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Capital gains — In a case where computation provision cannot apply, such a case would not fall within S. 45 — Artex Manufacturing’s case distinguished on facts.

New Page 1


 


  1. Capital gains — In a case where computation provision
    cannot apply, such a case would not fall within S. 45 — Artex Manufacturing’s
    case distinguished on facts    .

[PNB Finance Ltd. v. CIT, (2008) 307 ITR 75 (SC)]

 

The Punjab National Bank Ltd. was set up in 1895 in an area
which now falls in Pakistan. It was nationalised as Punjab National Bank (PNB)
by the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970.
On July 19, 1969 PNB Ltd. the appellant herein, on nationalisation received
compensation of Rs.10.20 crores. This compensation was calculated on the basis
of capitalisation of last 5 years’ profits. The said compensation was received
during the accounting year ending December 31, 1969, corresponding to the A.Y.
1970-71. During the A.Y. 1970-71, the appellant had to compute capital gains
u/s.48 by deducting from the sale consideration the cost of acquisition as
increased by the cost of improvement and expenses incurred in connection with
the transfer. Under the law then prevailing, the assessee could index the cost
of acquisition. A return was filed in this case by the assessee showing an
income of Rs.2,03,364.

 

The assessee in the course of assessment proceedings
submitted that he had an option u/s.55(2)(i) of having the value ascertained
as on January 1, 1954, whichever is higher, but could not exercise it as the
cost of acquisition in this case was not computable. In the alternative, the
assessee submitted the fair market value of the undertaking as on January 1,
1954. By letter dated September 30, 1970, the assessee claimed a capital loss.

 

The Assessing Officer, however, proceeded to hold on the
basis of capitalisation of the last 5 years’ profits the capital gains of
Rs.1,65,34,709.

 

Aggrieved by the decision of the Assessing Officer, the
matter was carried in appeal by the assessee to the Appellate Assistant
Commissioner who came to the conclusion that, in this case, it was not
possible to allocate the full value of the consideration received
(compensation) amounting to Rs.10.20 crores between various assets of the
undertaking and, consequently, it was not possible to determine the cost of
acquisition and cost of improvement under the provisions of S. 48 of the 1961
Act and since computation was inextrically linked with the charging provisions
u/s.45 of the said Act it was not possible to tax the tax the surplus, if any,
u/s.45 of the 1961 Act. Aggrieved by the decision of the Commissioner, the
Department went by way of appeal to the Tribunal which took the view that, in
this case, since the assessee had exercised its option for substitution of the
fair market value of the undertaking as on January 1, 1954, it was not open to
the assessee to contend that the cost of acquisition was not computable and,
therefore, the Assessing Officer was right in arriving at the figure of
capital gains fixed by him at Rs.1,65,34,709.

 

For the first time, relying upon S. 41(2), the High Court
dismissed the reference initiated at the behest of the assessee.

 

On an appeal, the Supreme Court held that as regards
applicability of S. 45, three tests are required to be applied. The first test
is that any surplus accruing on transfer of capital assets is chargeable to
tax in the previous year in which transfer took place. In this case, transfer
took place on July 18, 1969. The second test which needs to be applied is the
test of allocation/attribution. This test is spelt out in the judgment of this
Court in Mugneeram Bangur and Co. (Land Department) (1965) 57 ITR 299. This
test applies to a slump transaction. The object behind this test is to find
out whether the slump price was capable of being attributable to individual
assets, which is also known as itemwise earmarking. The third test is that
there is a conceptual difference between an undertaking and its components.
Plant machinery and dead stock are individual items of an undertaking. A
business undertaking can consist of not only tangible items but also
intangible items like, goodwill, manpower, tenancy rights and value of banking
licence. However, the cost of such items (intangibles) is not determinable. In
the case of CIT v. B. C. Sriniwasa Setty reported in [1981] 128 ITR
294, this Court held that S. 45 charges the profits or gains arising from the
transfer of a capital asset to Income-tax. In other words it charges surplus
which arises on the transfer of a capital asset in terms of appreciation of
capital value of that asset. In the said judgment, this Court held that the
‘asset’ must be one which falls within the contemplation of S. 45. It is
further held that, the charging Section and the computation provisions
together constitute an integrated code and when in a case the computation
provisions cannot apply, such a case would not fall within S. 45. In the
present case, the banking undertaking, inter alia, included intangible
assets like goodwill, tenancy rights, manpower and value of banking licence.
On the facts, the Supreme Court found that itemwise earmarking was not
possible. On the facts, it was found that the compensation (sale
consideration) of Rs.10.20 crores was not allocable item-wise as was the case
in Artex Manufacturing Co. (1997) 227 ITR 260. For the aforestated reasons,
the Supreme Court held that on the facts and circumstances of this case, which
concerned A.Y. 1970-71, it was not possible to compute capital gain and,
therefore, the said amount of Rs.10.20 crores was not taxable under Setion 45
of the 1961 Act. Accordingly, the impugned judgment was set aside. The Supreme
Court however, observed that in this case S. 55(2)(i) did not operationalise.
U/s.55(2), the fair market value as on January 1, 1954, could have substituted
the figure of cost of acquisition provided the figures of both ‘cost of
acquisition’ and ‘fair market value as on January 1, 1954’ were ascertainable.

Capital or Revenue — If the object of the subsidy scheme is to enable the assessee to run the business more profitably the receipt is on revenue account — if the object of the assistance under subsidy scheme is to enable the assessee to set up a new unit

New Page 1


 

  1. Capital or Revenue — If the object of the subsidy scheme is
    to enable the assessee to run the business more profitably the receipt is on
    revenue account — if the object of the assistance under subsidy scheme is to
    enable the assessee to set up a new unit or expand its existing unit, then the
    receipt is on capital account.



[CIT v. Ponni Sugars and Chemicals Ltd. (and other
connected appeals), (2008) 306 ITR 392 (SC)]

 

Co-operative Society — Deduction u/s.80P — Assessing
Authority should examine as to whether the society is engaged in its business
of banking or providing credit facilities to its members.

 

The Supreme Court was mainly concerned with the following
two questions in a batch of civil appeals, namely :

(i) Whether the incentive subsidy received by the
assessee is a capital receipt not includible in the total income ?

(ii) Whether the assessee was entitled to exemption
u/s.80P(2)(a)(i) of the Income-tax Act, 1961, in respect of the interest
received from the members of the society ?

 


For convenience the Supreme Court considered the 1980
scheme which was almost identical to 1987, 1988 and 1993 schemes. The dispute
pertained to the A.Y. 1986-87. In matter considered by the Supreme Court both
the above questions arose for determination. The incentives conferred under
that scheme were two-fold. First, in the nature of a higher free-sale sugar
quota and, second, in allowing the manufacturer to collect excise duty on the
sale price of the free-sale sugar in excess of the normal quota, but pay to
the Government only the excise duty payable on the price of levy sugar.

 

The Supreme Court observed that four factors existed in the
said schemes, which were as follows :

(i) Benefit of the incentive subsidy was available only
to new units and to substantially expanded units, not to supplement the
trade receipts.

(ii) The minimum investment specified was Rs.4 crores for
new units and Rs.2 crores for expansion units.

(iii) Increase in the free-sale sugar quota depended upon
increase in the production capacity.

(iv) The benefit of the scheme had to be utilised only
for repayment of term loans.

 


The main controversy arose in these cases because of the
reason that the incentive were given through the mechanism of price
differential and the duty differential. According to the Department, price and
costs are essential items that are basic to the profit making process and any
price related mechanism would normally be presumed to be revenue in nature. On
the other hand, according to the assessee, what was relevant to decide the
character of the incentive was the purpose test and not the mechanism of
payment.

 

According to the Supreme Court, the above controversy could
be resolved if it applied the test laid down in its judgment in the case of
Sahney Steel and Press Works Ltd. According to the Supreme Court the test to
be applied was that the character of the receipt in the hands of the assessee
had to be determined with respect to the purpose for which the subsidy was
given. The point of time at which the subsidy is paid is not relevant. The
source is immaterial. The form of subsidy is immaterial. If the object of the
subsidy scheme was to enable the assessee to run the business more profitably
then the receipt is on revenue account. On the other hand, if the object of
the assistance under subsidy scheme was to enable the assessee to set up a new
unit or to expand the existing unit then the receipt of the subsidy was on
capital account.

 

The Supreme Court referred to the decision of the House of
Lords in the case of Seaham Harbour Dock Co. v. Crook, (1931) 16 TC
333. In that case the Harbour Dock Co. had applied for grants from the
Unemployment Grants Committee from funds appropriated by Parliament. The said
grants were paid as the work progressed. The payments were made several times
for some years. The Dock Co. had undertaken the work of extension of its
docks. The extended dock was for relieving the unemployment. The main purpose
was relief from unemployment. Therefore, the House of Lords held that the
financial assistance given to the company for dock extension cannot be
regarded as a trade receipt.

 

The Supreme Court observed that the aforesaid judgment of
the House of Lords showed that the source of payment or the form in which the
subsidy is paid or the mechanism through which it is paid is immaterial and
what is relevant is the purpose for payment of assistance.

 

Applying the above tests to the facts of the present case
and keeping in mind the object behind the payment of the incentive subsidy,
the Supreme Court was satisfied that payment received by the assessee under
the scheme was not in the course of a trade, but was of capital nature.

Interest — Waiver of interest u/s.220(2) — Case of genuine hardship — Merely because a person has large assets could not per se lead to the conclusion that he would never be in difficulty as he can sell those assets and pay the amount of interest levied —

New Page 1

  1. Interest — Waiver of interest u/s.220(2) — Case of genuine
    hardship — Merely because a person has large assets could not per se
    lead to the conclusion that he would never be in difficulty as he can sell
    those assets and pay the amount of interest levied — When a request has been
    made to dispose of the seized assets and appropriate proceeds towards taxes,
    why the request was not acceded to should be gone into by the Commissioner.



[B. M. Malani v. CIT, (2008) 306 ITR 196 (SC)]

 

The appellant had been carrying on money-lending business
and trading in shares and securities. On or about September 4, 1994, a raid
was conducted in his residential premises by the authorities in exercise of
their powers u/s.132 of the Income-tax Act, 1961 (for short, ‘the Act’).
Amongst others, shares worth market value of Rs.61.38 lakhs and a demand draft
worth Rs.10 lakhs in the name of PAN Clothing Company Limited were seized. By
a letter dated December 15, 1994, a declaration was made by the appellant in
terms of Ss.(4) of S. 132 of the Act, by reason whereof he opted to pay taxes
from out of the seized shares and securities stating that the shares be
expeditiously disposed of and the sale proceeds therefrom be appropriated
towards taxes. The said request of the appellant was not acceded to.

 

The Income-tax Department demanded and recovered a sum of
Rs.40 lakhs in between the period January and March, 1995, for the A.Y.
1991-92 to 1994-95.

 

The appellant filed an application in terms of Ss.(1) of S.
245C before the Settlement Commission on January 2, 1996, whereupon an order
was passed by the Settlement Commission on December 2, 1999. The demand draft
drawn in the name of PAN Clothing Company Limited worth Rs.10 lakhs which was
seized during the course of search was encashed by the Income-tax Department
in July, 2000, after the same was got revalidated.

 

By an order dated March 8, 2002, the Income-tax Officer,
Ward-10(1), Hyderabad, levied interest for a sum of Rs.31,41,106 u/s.220(2) of
the Act for the A.Ys. 1990-91 to 1995-96.

 

The appellant thereafter filed an application for waiver of
interest on diverse dates, i.e., April 3, 2002, May 14, 2002, and
September 16, 2002. The same was rejected by the Commissioner of Income-tax by
reason of an order dated November 26, 2002, opining that the appellant did not
satisfy all the three conditions which were required for allowing a waiver
petition. The High Court dismissed the writ petition filed by the appellant.
On an appeal to the Supreme Court, it was held that for interpretation of the
aforementioned provision, the principle of purposive construction should be
resorted to. Levy of interest although is statutory in nature, inter alia is
for recompensating the Revenue from loss suffered by non-deposit of tax by the
assessee within the time specified therefor. The said principle should also be
applied for the purpose of determining as to whether any hardship had been
caused or not. A genuine hardship would, inter alia, mean a genuine
difficulty. That per se would not lead to a conclusion that a person
having large assets would never be in difficulty as he can sell those assets
and pay the amount of interest levied.

 

The Supreme Court further held that the Commissioner has
the discretion not to accede to the request of the assessee, but that
discretion must be judiciously exercised. He has to arrive at a satisfaction
that the three conditions laid down therein have been fulfilled before passing
an order waiving interest.

 

According to the Supreme Court, compulsion to pay any
unjust dues per se would cause hardship. But a question, however, would
further arise as to whether the default in payment of the amount was due to
circumstances beyond the control of the assessee.

 

The Supreme Court was of the view that, unfortunately, this
aspect of the matter had not been considered by the learned Commissioner and
the High Court in its proper perspective. The Supreme Court observed that the
Department had taken the plea that unless the amount of tax due was
ascertainable, the securities could not have been sold and the demand draft
could not have been encashed. The Supreme Court held that the same logic would
apply to the case of the assessee in regard to levy of interest also. It is
one thing to say that the levy of interest on the ground of non-payment of
correct amount of tax by itself can be a ground for non-acceding to the
request of the assessee as the levy is a statutory one, but it is another
thing to say that the said factor shall not be taken into consideration at all
for the purpose of exercise of the discretionary jurisdiction on the part of
the Commissioner. The appellant volunteered that the securities be sold. Why
the said request of the appellant could not be acceded to has not been
explained.

 

The Supreme Court observed that as the offer was voluntary,
the authorities of the Department subject to any statutory interdict could
have considered the request of the appellant. It was probably in the interest
of the Revenue itself to realise its dues. Whether this could be done in law
or not has not been gone into. The same ground, however, was not available to
the appellant in respect of the demand draft, as in relation thereto no such
request was made.

 

The Supreme Court was of the opinion that interests of
justice would be sub-served if the impugned judgment was set aside and the
matter was remitted to the Commissioner of Income-tax for consideration of the
matter afresh. The appeal was allowed accordingly.

Substantial questions of law — Whether the freight paid by the assessee (AOP) to truck owners who in turn are members of the said AOP is subject to TDS u/s.194C(2) of the Act, is a substantial question of law.

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  1. Substantial questions of law —
    Whether the freight paid by the assessee (AOP) to truck owners who in turn are
    members of the said AOP is subject to TDS u/s.194C(2) of the Act, is a
    substantial question of law.

[CIT v. Sirmour Truck
Operators Union (No. 1), (2009) 313 ITR 26 (SC)]

[CIT v. Sirmour Truck
Operators Union (No. 2), (2009) 313 ITR 27 (SC)]

M/s. Gujarat Ambuja Cements
Ltd. entered into a contract with M/s. Sirmour Trucks Operators Union, a
society, consisting of truck operators as its members. The question which
arose before the High Court was whether the freight paid by the assessee (AOP)
to truck owners, who in turn are members of the said AOP, is subject to TDS
u/s.194C(2) of the Act. According to the Supreme Court, the afore-stated
question was a substantial question of law and the High Court ought to have
decided the said question and ought not to have dismissed the appeals
summarily. The Supreme Court therefore remitted the matter to the High Court
for consideration in accordance with the law.

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Writ petition — Under Income-tax Act, the unit of assessment is a ‘year’ and hence it is not open to a court to direct by an omnibus order that all subsequent years are connected years and that income be treated in same manner for all the years.

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  1. Writ petition — Under
    Income-tax Act, the unit of assessment is a ‘year’ and hence it is not open to
    a court to direct by an omnibus order that all subsequent years are connected
    years and that income be treated in same manner for all the years.


[Dy. CIT v. Divya
Investment P. Ltd., (2004) 313 ITR 363 (SC)]

 

The assessee, a private
limited company, carried on the business, inter alia, of hire-purchase.
The assessee took on lease a land with existing structure. The lease deed was
entered into on October 30, 1986. The lease was for ten years. The assessee
demolished the structure and constructed a multi-storeyed building which was
let out to Canara Bank and others. The assessee received hiring charges and
maintenance charges from the lessees. Thereafter, the respondent filed its
return for the A.Y. 1997-98. The Assessing Officer held that it was an income
from house property and not from business as claimed by the assessee in its
return. The assessment order was confirmed by the Commissioner of Income-tax
(Appeals) and cases for earlier assessment years from 1992 to 2000 were
ordered to be reopened by issuance of notice u/s.148 of the Income-tax Act.

Aggrieved by the decision of
the Commissioner of Income-tax (Appeals), the matter was carried in appeal to
the Tribunal. The Tribunal held that hire charges received by the assessee
were liable to be assessed as business income and not as income from property.

Against the notices issued
u/s.148 reopening the assessments, the assessee filed a separate writ petition
for each of the assessment years in which reopening was ordered. The High
Court held in all the writ petitions that the income should be treated as
business income and not as income from house property as held by the Tribunal.
The decision of the High Court was based on the fact that for one assessment
year of the assessee (viz. 1997-98), the Tribunal had held that income
should be treated as income from business and not as income from house
property and so long as this view of the Tribunal was not reversed, all the
subordinate authorities were bound by this decision.

On an appeal the Supreme Court
held that it was not open to the High Court to direct by an omnibus order that
all subsequent years were connected years and that income be treated only as
business income. Under the Income-tax Act, the unit of assessment is a ‘year’.
According to the Supreme Court the parties should have been relegated to move
the Tribunal by filing an appeal u/s.253(1) and it was not open to the High
Court to entertain the writ petitions.

The Supreme Court, however,
clarified that in this case there were two separate proceedings involved,
viz., the order of the Commissioner of Income-tax (Appeals) plus
proceedings u/s.148. Unfortunately, all proceedings were clubbed in the writ
petitions. The exact status of those proceedings was not known. If the
assessee objected to the reopening of assessment, then, it was required to
file revised returns. The Supreme Court refrained from expressing any opinion
in that regard. Similarly, if the decision of the Commissioner of Income-tax
(Appeals) was sought to be challenged for a given year, then, the assessee
ought to have filed appeals u/s. 253(1) before the Tribunal. However, since
the writ petitions were pending in the High Court, the Supreme Court directed
that if appeals were required to be filed, then they shall be filed within
four weeks from the date of the order in which they shall not be dismissed on
the ground of delay.


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Substantial question of law — While allowing the deduction of expenditure, nature of such expenditure is required to be examined — Question of nature of expenses is a substantial question of law.

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  1. Substantial question of law —
    While allowing the deduction of expenditure, nature of such expenditure is
    required to be examined — Question of nature of expenses is a substantial
    question of law.

[CIT v. Oswal Agro Mills
Ltd., (2009) 313 ITR 24 (SC)]

The Supreme Court observed
that in this case, the substantial question of law which arose before the High
Court u/s.260A was as follows :

“Whether the assessee is
entitled to deduction of Rs.1,16,89,327 incurred as ‘issue management
expenses’ ?”

On reading the judgments of
the Tribunal and the High Court, the Supreme Court found that the assessee had
succeeded only on the basis of ‘rule of consistency’. According to the Supreme
Court, the High Court should have examined the nature of the
said expenses, namely, ‘issue management expenses’. The Supreme Court was of
the view that substantial question of law did arise for determination.

Consequently, the Supreme
Court set aside the impugned judgment of the High Court and remitted the
matter to the High Court for fresh consideration in accordance with law.

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Penalty — Concealment of income — Penalty can be levied u/s.271(1)(c) even in a case where positive income is reduced to nil after set off of carried forward losses of earlier years.

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  1. Penalty — Concealment of
    income — Penalty can be levied u/s.271(1)(c) even in a case where positive
    income is reduced to nil after set off of carried forward losses of earlier
    years.

[CIT v. R.M.P. Plasto P.
Ltd., (2009) 313 ITR 397 (SC)]

The question that came up for
consideration before the High Court was whether the Appellate Tribunal was
right in law and on facts in cancelling the penalty levied u/s.271(1)(c) of
the Act on the ground that there was loss assessed in the year under
consideration, without appreciating the fact that there was positive income
which was reduced to nil only after allowing set off of carried forward losses
of earlier years. The High Court dismissed the appeal following its decision
in the case of CIT v. Avon Flours P. Ltd., (2009) 313 ITR 400 (Guj.).

On appeal, the Supreme Court
allowed the appeal in view of the judgment of the larger Bench in CIT v.
Gold Coin Health Food P. Ltd., (2008) 304 ITR 308 (SC).

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Export business — Deduction u/s.80HHC — ‘Rights’ of movies for telecasting for a period of five year would fall in the category of articles of trade and commerce, hence merchandise — So far as films are concerned the word ‘lease’ is included in the meanin

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  1. Export business — Deduction
    u/s.80HHC — ‘Rights’ of movies for telecasting for a period of five year would
    fall in the category of articles of trade and commerce, hence merchandise — So
    far as films are concerned the word ‘lease’ is included in the meaning of the
    word ‘sale’.

[CIT v. B. Suresh,
(2009) 313 ITR 149 (SC)]

During the relevant A.Y.
1993-94, the assessee, B. Suresh, transferred feature film rights for
exploitation outside India and earned income in foreign exchange. The assessee
claimed deduction u/s.80HHC in respect of the said receipts. The Assessing
Officer held that the assessee was not entitled to deduction u/s.80HHC,
inter alia, on the ground that the export was not of merchandise or goods
as contemplated u/s.80HHC, but was merely an export of ‘rights’ in the film.
This decision of the AO was overruled by the Commissioner of Income-tax
(Appeals). When the matter came before the Tribunal at the instance of the
Department, there was already a judgment of the Bombay High in the case of
Abdulgafar A. Nadiadwala v. ACIT, (2004) 267 ITR 488. Following the said
decision, the Tribunal and the High Court held that the assessee was entitled
to deduction u/s.80HHC. On an appeal by the Department, the assessee inter
alia invited attention of the Supreme Court to the scheme of S. 80HHC to
point out that the word ‘sale’ would also include ‘lease’ as indicated in Rule
9A(7) which states that for the purposes of Rule 9A, the ‘sale’ of the rights
of exhibition of feature films would include the ‘lease’ of such rights.
Similarly, under Rule 9B(6), it has been, inter alia, provided that
‘Sale’ of rights of exhibition of a feature film would include ‘lease’ of such
rights.

The Supreme Court held that
the basic requirement of S. 80HHC is earning in foreign exchange and retention
of profits for export business. Profits are embedded in the ‘income’ earned.
Earning of income depends on sale of goods and services. Today the difference
between the two is getting blurred with globalisation and cross-border
transaction. Today with technological advancement one has to change the
thinking regarding concepts like goods, merchandise and articles. In the
instant case the assessee had bought rights of various decoders and had
recorded movies on beta-cam tapes which were transferred as telecasting rights
to Star T.V. for five years (it has a limited life). Hence, such ‘rights’
would certainly fall in the category of articles of trade and commerce, hence,
merchandise. On the question as to whether transfer of the said rights by way
of lease would attract S. 80HHC, the Supreme Court found merit in the
contention that under Rule 9A and 9B, the word ‘lease’ is included in the
meaning of the word ‘sale’. In conclusion the Supreme Court observed that
there was no infirmity in the judgment of the Bombay High Court in the case of
Abdulgafar A. Nadiadwala (supra).

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Exemption — S. 10(5) — Leave travel concession/Conveyance allowance — For the purpose of S. 192, employer need not collect and examine the supporting evidence to the deduction submitted by the employees.

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  1. Exemption — S. 10(5) — Leave
    travel concession/Conveyance allowance — For the purpose of S. 192, employer
    need not collect and examine the supporting evidence to the deduction
    submitted by the employees.

[CIT v. Larsen and Toubro
Ltd., (2009) 313 ITR 1 (SC)]

A short question which arose
for determination in the civil appeal(s) before the Supreme Court was, whether
the assessee(s) was/were under statutory obligation under the Income-tax Act,
1961, and/or the Rule to collect evidence to show that its employee(s) had
actually utilised the amount(s) paid towards leave travel concession(s)/conveyance
allowance.

The Supreme Court held that
the beneficiary of exemption u/s.10(5) was an individual employee and there is
no circular of the Central Board of Direct Taxes (CBDT) requiring the employer
u/s.192 to collect and examine the supporting evidence to the declaration to
be submitted by an employee(s).

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

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

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

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

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

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

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

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

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

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

New Page 1

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

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

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

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

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

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

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

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

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

[Khoday Distilleries Ltd. v. CIT and Another, (2008)
307 ITR 312 ((SC)]

On January 29, 1986, the appellant-company, on the other
shareholders not exercising the option given to them to take up the rights
shares issued by the appellant, allotted them to the seven investment
companies, who were the shareholders in the appellant-company. In all there
were twenty-seven shareholders. Twenty shareholders did not subscribe to the
rights issue and consequently the appellant-company allotted shares to the
remaining existing shareholders. The Assessing Officer held that the said
allotment by way of rights issue was without adequate consideration within the
meaning of S. 4(1)(a) of the Gift Tax Act, 1958 (1958 Act). He further held
that the modus operandi was an attempt to evade taxes, that it was a
colourable transaction and since the shares allotted were without adequate
consideration, there was a deemed gift u/s.4(1)(a) of the 1958 Act.
Accordingly, the difference between the value of the shares on yield basis and
the face value of Rs.10 at which the shares were allotted was sought to be
brought to tax under the said Section. Aggrieved by the decision of the
Assessing Officer, the appellant carried the matter in appeal to the
Commissioner of Income-tax (Appeals). It was held that the entire exercise
undertaken by the appellant was to evade payment of wealth-tax by the
individual shareholders of the appellant-company. This finding was given by
the Commissioner of Income-tax (Appeals) on the ground that rights shares were
allotted because 20 existing shareholders out of 27 shareholders of the
company did not subscribe for the rights shares. However, according to the
Commissioner of Income-tax (Appeals), gift tax proceedings had to be initiated
by the Department not against the appellant-company but it ought to have
initiated gift-tax proceedings against the exiting shareholders who had
renounced their rights. Having so held, the Commissioner of Income-tax
(Appeals) came to the conclusion that the entire exercise undertaken by the
appellant was to avoid payment of wealth-tax and therefore, it was held that
the company was liable to pay gift-tax for transfer of the said shares to the
seven investment companies. This decision of the Commissioner of Income-tax
(Appeals) stood reversed by Tribunal which decided the appeal filed by the
company against the Department. The Tribunal came to the conclusion that the
allotment of rights shares by the appellant did not constitute ‘transfer’ as
it did not involve any existing property at the time of such allotment.
According to the Tribunal, the seven investment companies made payment towards
the face value of the shares and, consequently, it cannot be said that the
contract was without consideration. It was further held that in this case
there was no element of gift u/s.4(1)(a) as there was no transfer of property
as defined u/s. 2(xxiv) of the 1958 Act. Aggrieved by the decision of the
Tribunal, the Department preferred gift-tax Appeal No. 2/02 which, vide the
impugned judgment stood disposed of in favour of the Department.

On an appeal by the assessee, the Supreme Court held that
there is a vital difference between ‘creation’ and ‘transfer’ of shares. As
stated hereinabove, the words ‘allotment of shares’ have been used to indicate
the creation of shares by appropriation out of the unappropriated share
capital to a particular person. A share is a chose-in-action. A
chose-in-action implies existence of some person entitled to the rights in
action in contradistinction from rights in possession. There is a difference
between issue of a share to a subscriber and the purchase of a share from an
existing shareholder. The first case is that of creation, whereas the second
case is that of transfer of chose-in-action. In this case, when twenty
shareholders did not subscribe to the rights issue, the appellant allotted
them to the seven investment companies, such allotment was not transfer. In
the circumstance, S. 4(1)(a) was not applicable as held by the Tribunal.

The Supreme Court further held that there is a difference
between ‘renunciation’ and ‘allotment’. In this case, the Department has
confused the two concepts. The judgment of the Madras High Court in the case
of S. R. Chockalingam Chettiar, (1968) 70 ITR 397 dealt with the case of
renunciation in which case under certain circumstance the renouncer could be
treated as a donor liable to be taxed u/s.4(1)(a) of the Gift-tax Act, 1958.
That was not the situation here. The Department had sought to tax the
appellant-company as a donor under the 1958 Act for making allotment of rights
shares. The Department had not taxed the renouncer shareholders despite the
decision of the Commissioner of Income-tax (Appeals). Allotment is not a
transfer. Moreover, there is no element of existing right in the case of
allotment as required u/s.2(xii) of the 1958 Act. In the case of renunciation
for inadequate consideration in a given case S. 4(1)(a) could stand attracted.
However, in such a case, the Department has to proceed against recouncer
(shareholder). For the above reasons, the judgment of the Madras High Court in
S. R. Chockalingam Chettiar’s case (1968) 70 ITR 397 had no application.

The second issue to be decided by the Supreme Court was
whether there was an element of ‘gift’ in the appellant issuing bonus shares
in the ratio of 1 : 23 in April/May, 1986. In addition to the levy of gift-tax
on the allotment of rights shares, the Assessing Officer levied gift tax on
the bonus shares issued later by the appellant. The Supreme Court held that
when a company is prosperous and accumulates a large surplus, it converts this
surplus into capital and divides the capital amongst the members in proportion
to their rights. This is done by issuing fully paid shares representing the
increased capital. Shareholders to whom the shares are allotted have to pay
nothing. The purpose is to capitalise profits which may be available for
division. Bonus shares go by the modern name of ‘capitalisation shares’. If
the articles of a company empower the company, it can capitalise profits or
reserves and issue fully paid shares of nominal value, equal to the amount
capitalised, to its shareholders. The idea behind the issue of bonus shares is to bring the nominal share capital into line with the excess of assets over liabilities. A company would like to have more working capital, but it need not go into the market for obtaining fresh capital by issuing fresh shares. The necessary money is available with it and this money is converted into shares, which really means that the undistributed profits have been ploughed back into the business and converted into share capital. Therefore, fully paid bonus shares are merely a distribution of capitalised undivided profit. It would be a misnomer to call the recipients of bonus shares as donees of shares from the company. The profits made by the company may be distributed as dividends or retained by the company as its reserve which may be used for improvement of the company’s works, buildings and machinery. That will enable the company to make larger profits. There cannot be any dispute that the shareholders will benefit from the improvements brought about in profit-making apparatus of the company. Like-wise, if the accumulated profits are capitalised and capital base of the company is enlarged, this may enable the company to do its business more profitably. The shareholders will also benefit if the capital is increased. They may benefit immediately by issue of bonus shares. But neither in the case of improvement in the profit-making apparatus nor in the case of expansion of the share capital of the company, can it be said that the shareholders have received any money from the company. They may have benefited in both the cases. But this benefit cannot be treated as distribution of the amount standing to the credit of any reserve fund of the company to its shareholders.

One of the points raised on behalf of the Department before the Supreme Court was that the entire exercise undertaken by the appellant constituted tax evasion. According to the Department, by a paltry investment of Rs.10 lakhs (approximately) the seven investment companies became owners of 24,00,168 shares of M/s. Khoday Distilleries Ltd. worth Rs. 2,40,01,680. According to the Department, the market value of the said shares and the yield from the said shares were totally disproportionate to the investment made by the seven investment companies. Therefore, according to the Department, the modus operandi adopted by the appellant was an exercise in tax evasion. The Supreme Court observed that it does not know the reason why the Department had not proceeded under the Income-tax Act, 1961, if, according to the Department, the case was of tax evasion. According to the Commissioner of Income-tax (Appeals), the appellant had undertaken an exercise to avoid wealth-tax, whereas according to the Assessing Officer the exercise undertaken by the appellant was to evade gift-tax and in the same breath the Assessing Officer states that the entire exercise was to evade tax by allotting shares to the directors which attracted the deeming prevision of S. 2(22) of the 1961 Act. According to the Supreme Court there was utter confusion on this aspect. The Supreme Court, therefore, was of the view that on the question of evasion of tax, the contention of the Department was conflicting and in fact, the Department had messed up the entire case.

The Supreme Court, therefore, set aside the judgment of the High Court and the civil appeal filed by the assessee was allowed.

High Court — Writ petition — Whether appeal lies to the Division Bench or not is not to be decided on the basis of nomenclature given in writ petition.

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  1. High Court — Writ petition — Whether appeal lies to the
    Division Bench or not is not to be decided on the basis of nomenclature given
    in writ petition.

 

[M.M.T.C. Ltd. v. CCT & Ors., (2008) 307 ITR 276
(SC)]

The challenge in the appeal to the Supreme Court was to the
judgment of the Division Bench of the Madhya Pradesh High Court dismissing the
writ appeal filed by the appellant on the ground that it was not maintainable.
The appeal was filed u/s.2(1) of the M.P. Uchcha Nyayalay (Khand Nyaypeeth Ko
Appeal) Adhiniyam, 2005 (hereinafter referred to as, ‘the Act’). It was held
that the order was passed in exercise of power of superintendence under
Article 227 of the Constitution of India, 1950 (in short, ‘the Constitution’)
against which the Letters Patent appeal is not maintainable. The order of the
learned Single Judge was passed on 09.11.2005. Against the said order, special
leave petition was filed which was disposed of by the Supreme Court by order
dated February 16, 2006.

The Supreme Court had directed the High Court to consider
the LPA on the merits and time was granted to prefer the LPA within three
weeks. The High Court was directed to dispose of the LPA on the merits if it
was otherwise free from defect.

The High Court construed the order as if the Supreme Court
had only waived the limitation for filing of the Letters Patent appeal and
there was no direction to consider the case on merits.

Before the Supreme Court it was contended that the
conclusion of the High Court that merely limitation was waived was contrary to
the clear terms of the earlier order of this Court. Additionally, it was
submitted that the prayer in the writ petition was to quash the order passed
by the Assistant Commissioner, Commercial Tax. That being so, the mere fact
that the writ petition was styled under Article 227 of Constitution was of no
consequence. It is the nature of the relief sought and the controversy
involved which determines the article which is applicable.

The Supreme Court held that the High Court was not
justified in holding that the Supreme Court’s earlier order only waived the
limitation for filing a Letters Patent appeal. The Supreme Court held that on
that score alone the High Court’s order was unsustainable.

The Supreme Court observed that in addition, the High Court
seemed to have gone by the nomenclature, i.e., the description given in
the writ petition to be one under Article 227 of the Constitution. The High
Court did not consider the nature of the controversy and the prayer involved
in the writ petition. As noted above, the prayer was to quash the order of
assessment passed by the Assistant Commissioner, Commercial Tax levying
purchase tax as well as entry tax.

The Supreme Court referring to the precedents held that the
High Court was not justified in holding that the Letters Patent appeal was not
maintainable. In addition, a bare reading of the Court’s earlier order showed
that the impugned order was clearly erroneous. The impugned order was set
aside directing that the writ appeal shall be heard by the Division Bench on
merits.

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Exemption — Income not forming part of the total income — Whether State-controlled Committee/Boards and companies constituted to implement the educational policy of the State should be treated as educational institution eligible for exemption u/s.10(22) o

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7 Exemption — Income not forming part of the total income —
Whether State-controlled Committee/Boards and companies constituted to implement
the educational policy of the State should be treated as educational institution
eligible for exemption u/s.10(22) of the Act — Matter remanded.


[Assam State Text Book Production And Publication Corporation
Ltd. v. CIT, (2009) 319 ITR 317 (SC)]

In the appeals before the Supreme Court, it was concerned
with the A.Ys. 1981-82 to 1996-97, except the A.Y. 1989-90. The question which
arose before the Assessing Officer was whether the Corporation could be termed
as an ‘educational institution’ in terms of S. 10(22) of the 1961 Act ?
According to the Assessing Officer, since the assessee, during the relevant
years, had income exclusively from publication and selling of textbooks to the
students, exemption u/s.10(22) of the Act, as it stood at the material time, was
not admissible. According to the Assessing Officer, the assessee did not exist
solely for educational purposes, particularly in view of clause 21 of the
memorandum of association which provided for distribution of dividends, hence,
its income was not exempt u/s. 10(22) of the Act. This decision of the Assessing
Officer was upheld by the Commissioner of Income-tax (Appeals). In the Tribunal,
there was a difference of opinion between the Member (Judicial) and the Member
(Accountant). By decision of the majority, it was held that the Corporation was
an educational institution and, consequently, the Corporation was entitled to
the benefit of exemption u/s.10(22) of the Act for the relevant assessment years
in question. However, in appeal filed by the Department, the High Court came to
the conclusion that the income of the Corporation, during the relevant
assessment years, was not exempt, particularly in view of the fact that the
assessee did not exist solely for education purposes; that it did not solely
impart education and that its income during the relevant assessment years was
only from publishing and sale of text-books, which according to the High Court,
constituted a profit-earning activity. Against the said decision, the assessee
has come to the Supreme Court by way of civil appeals.

On going through the records, the Supreme Court found that
the High Court had not taken into account the prior history of the case,
particularly in the context of incorporation of the Corporation under the
Companies Act, 1956, as a Government company. Initially, the assessee was a
State-controlled Committee and Board, which was attached to the Office of the
Director of Public Instruction, State of Assam. It was only in the year 1972,
that the Government company got constituted u/s.617 of the Companies Act, 1956;
that, prior to 1972, the entire funding for the working of the Committee/Board
was done by the State of Assam and that even the ownership of the assets
remained vested in the State of Assam, which stood transferred to the
Corporation in 1972, when it got incorporated under the Companies Act, 1956. The
Supreme Court observed that the assessee was a Government company. It was
controlled by the State of Assam. The aim of the said Corporation was to
implement the State’s policy on education; that, clause 21 of the memorandum and
articles of association provided a return on investment to the State of Assam;
that, in the year 1975, in a similar situation, the Central Board of Direct
Taxes (for short, ‘the CBDT’) had granted exemption u/s.10(22) of the Act, vide
letter dated August 19, 1975, to the Tamil Nadu Text Books Society, which
performed activities similar to those of the assessee. The letter dated August
19, 1975, was referred to in the judgment of the Rajasthan High Court in the
case of CIT v. Rajasthan State Text Book Board reported in (2000) 244 ITR
667. A similar question came up for consideration before the Rajasthan High
Court, namely, whether the Rajasthan State Text Book Board was entitled to
exemption u/s.10(22) of the Income-tax Act, 1961 ?

The Rajasthan High Court in its judgment recited that, under
a similar situation, the CBDT had also extended the benefit of exemption under
10(22) of the Act to the Orissa Secondary Board Education, as reported in
Secondary Board of Education v. ITO, (1972) 86 ITR 408 (Orissa). Following
these circulars/letters issued by the CBDT, the Rajasthan High Court had come to
the conclusion that the assessee in that case, namely, Rajasthan State Text Book
Board, was entitled to claim the benefit of exemption u/s.10(22) of the Act.

The Supreme Court, in view of the above, was of the opinion
that the High Court, in its impugned judgment, had not considered the historical
background in which the Corporation came to be constituted; secondly, the High
Court ought to have considered the source of funding, the sharehold-ing pattern
and aspects, such as return on investment; thirdly, it had not considered the
letters issued by the CBDT which are referred to in the judgment of the
Rajasthan High Court granting benefit of exemption to various Board/Societies in
the country u/s.10(22) of the Act; fourthly, it has failed to consider the
judgments mentioned hereinabove; and lastly, it had failed to consider the
letter of the Central Government dated July, 1973, to the effect that all
State-controlled Educational Committee(s)/Board(s) were constituted to implement
the educational policy of the State(s); consequently, they should be treated as
educational institutions.

For the aforesaid reasons, the Supreme Court was of the view
that, instead of remanding the matter to the High Court, it was appropriate that
the matter was remitted to the Assessing Officer to consider it de novo in the
light of the above.

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Block assessment — Only brought forward losses of the past years under Chapter VI and unabsorbed depreciation u/s.32(2) were to be excluded while aggregating the total income or loss of each previous year in the block period, but set-off of the loss suffe

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  1. Block assessment — Only brought forward losses of the past
    years under Chapter VI and unabsorbed depreciation u/s.32(2) were to be
    excluded while aggregating the total income or loss of each previous year in
    the block period, but set-off of the loss suffered in any of the previous
    years in the block period against the income assessed in other previous years
    in the block period was not prohibited.

[ E. K. Lingamurthy & Anr. v. Settlement Commission (IT
and WT) & Anr., (2009) 314 ITR 305 (SC)]

The Income-tax Department conducted a search u/s.132 of the
Act on 11-10-1996 on the business premises of the petitioner-assessees as well
as on their family members who were partners in various firms. The assessment
proceedings were initiated under Chapter XIV-B of the Act. A consolidated
application was filed before the Settlement Commission for the block period
1-4-1986 to 11-10-1996. The said application was admitted. The petitioners
claimed unabsorbed depreciation and business loss for the A.Y. 1995-96 and
1996-97 comprised in the block period. The claim was rejected by the
Settlement Commission by referring to S. 158BB(4) and Explanation (a) to S.
158BA(2) holding that the unabsorbed loss and current depreciation claimed in
the regular return should be determined and allowed to be carried forward for
future adjustment only in the regular assessment and consequently, the claim
for adjustment of unabsorbed depreciation against the undisclosed income in a
block assessment would not be considered. The High Court rejected the writ
petition filed by the petitioners holding that the provisions of Chapter XIV-B
did not indicate even a remote possibility for considering a claim of set-off
or brought forward losses under Chapter VI or unabsorbed depreciation
u/s.32(2) to be considered in determination of undisclosed income.

Before the Supreme Court the assessee contended that there
was a conceptual difference between current depreciation and carried forward
unabsorbed depreciation. It was the case of the assessee that Explanation (a)
to S. 158BB did not rule out current year’s losses or current year’s
depreciation; it only ruled out the brought forward losses or unabsorbed
depreciation u/s.32(2).

The Supreme Court held that S. 158BB, inter alia,
states that undisclosed income of the block period shall be “the aggregate of
the total income of the previous years falling within the block period”
computed in accordance with the provisions of Chapter IV. ‘Total income’ is
defined in S. 2(45) to mean the total amount of income referred to in S. 5,
computed in the manner laid down in the Act. In other words, Chapter XIV does
not rule out Chapter IV of the Act in the matter of computation of undisclosed
income under Chapter XIV-B. Ordinarily, in the case of regular assessment, the
unit of assessment is one year consisting of twelve months whereas in the case
of block assessment, the unit of assessment consists of ten previous years and
the period up to the date of the search. S. 158BB provides for aggregation of
income/loss of each previous year comprised in the block period. The block
period assessment under Chapter XIV-B is in addition to regular assessment.

According to the Supreme Court, analysing S. 158BB(4) read
with Explanation (a) thereto, it was clear that only brought forward losses of
the past years under Chapter VI and unabsorbed depreciation u/s.32(2) were to
be excluded while aggregating the total income or loss of each previous year
in the block period, but set-off of the loss suffered in any of the previous
years in the block period against the income assessed in other previous years
in the block period was not prohibited. According to the Supreme Court the
Settlement Commission had erred in disallowing the application of the assessee
for set-off of inter se losses and depreciation accruing in any of the
previous years in the block period against the income returned/assessed in any
other previous year in the block period.

Depreciation — Balancing charge — Assets whose cost does not exceed Rs.5,000 — Depreciation claimed at 100% — Sale of scrap — Those purchased after 1-4-1995 taxable u/s.50 — Those purchased prior to 1-4-1995, not liable to tax.

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  1. Depreciation — Balancing charge — Assets whose cost does
    not exceed Rs.5,000 — Depreciation claimed at 100% — Sale of scrap — Those
    purchased after 1-4-1995 taxable u/s.50 — Those purchased prior to 1-4-1995,
    not liable to tax.

[Nectar Beverages P. Ltd. v. Dy. CIT, (2009) 314 ITR
314 (SC)]

The assessee (Nectar Beverages P. Ltd.), a company which
derived income from manufacture and sale of soft drinks, claimed depreciation
in respect of the bottles and crates (trays) purchased by it at 100 percent
under the proviso to S. 32(i)(ii) of the Act, which was allowed from time to
time. During the financial year relevant to the A.Y. 1991-92, the assessee
sold scrap of bottles and trays (crates) for Rs. 50,850. However, in the
computation of income, the assessee reduced the sale consideration from the
income on the ground that the amount received was a capital receipt and since
it did not form part of the block of assets, even the provision of S. 50 of
the said Act relating to short-term capital gain on sale of depreciable asset
was not attracted. The Assessing Officer held that depreciation having been
allowed to the assessee, the proviso to S. 50 of the Act was applicable. The
Commissioner of Income-tax (Appeals) dismissed the appeal, however, holding
that a deduction had been made in the earlier assessment year in respect of
the expenditure incurred and, subsequently, the assessee having obtained the
amount in respect of such expenditure, the same was chargeable to tax
u/s.41(1) of the Act. The Tribunal confirmed the order of the Commissioner of
Income-tax (Appeals). The High Court also dismissed the appeal.

On appeal, the Supreme Court held that prior to April 1,
1988, S. 41(1) and S. 41(2), both existed on the statute book. S. 41(2)
specifically brought to tax the balancing charge as a deemed income under the
1961 Act. It stated that where any plant owned by the assessee and used for
business purposes was sold, discarded or destroyed and the moneys payable in
respect of such plant exceeded the written down value, then so much of the
surplus which did not exceed the difference between the actual and the
written-down value was made chargeable to tax as business income of the
previous year in which moneys payable for the plant became due. In other
words, S. 41(2) made the balancing charge taxable as business income.
According to the Supreme Court if the argument of the Department of reading
the balancing charge u/s.41(2) into S. 41(1) was to be accepted, then it was
not necessary for the Parliament to enact S. 41(2) in the first instance. In
that event, S. 41(1) alone would have sufficed. The Supreme Court held that,
S. 41(1), S. 41(2), S. 41(3) and S. 41(4) operated in different spheres.

In another batch of appeals, the Supreme Court considered
the effect of introduction of the Finance (No. 2) Act, 1995, with effect from
April 1, 1996. The Supreme Court noted that by the above Finance Act, the
first proviso to S. 32(1)(ii) stood deleted with effect from April 1, 1996.
Consequently, bottles, crates and cylinders whose individual cost did not
exceed Rs.5,000 also came to be included in the block of assets. One of the
assessees, M/s. Goa Bottling Company Pvt. Ltd. was a company registered under
the Companies Act, 1956, and was in the business of manufacture and sale of
soft drinks. For the purposes of its business, it bought bottles and crates
whose cost per unit did not exceed Rs. 5,000. During the year ending March 31,
1998, the company received a sum of Rs.6,89,91,901 on sale of scrap bottles
and crates. The sale proceeds were segregated in two parts :

(a) in respect of bottles and crates purchased prior to
March 31, 1995; and

(b) those purchased after April 1, 1995.

In the return of income filed, the sale proceeds relating
to bottles and crates purchased after April 1, 1995, were taken into
consideration for the purpose of computation of short-term capital gains
u/s.50 whereas the sale proceeds relating to bottles and crates purchased
prior to March 31, 1995, was not offered for short-term capital gains on the
ground that the assets stood depreciated at 100% under the proviso to S.
32(1)(ii) and hence did not form part of the block of assets.

For the reasons given hereinabove, the Supreme Court held
that the bottles and crates purchased prior to March 31, 1995, did not form
part of the block of assets, hence, profits on sale of such assets were not
taxable as a balancing charge, neither u/s.41(1) nor u/s.50. In respect of
bottles and crates purchased after April 1, 1995, on account of deletion of
the proviso to S. 32(1)(ii) (vide Finance Act, 1995) such bottles and crates
formed part of block of assets and consequently such assets purchased after
April 1, 1995, in this case, became exigible to capital gains tax u/s.50.