Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

Category: Glimpses Of Supreme Court Rulings

Companies — Special provisions — Minimum Alternate Tax — In determining the book profit of a private limited company whether depreciation should be allowed as per Income-tax Rules or as per the Companies Act — Matter referred to Larger Bench.

New Page 2

17 Companies — Special provisions — Minimum Alternate Tax —
In determining the book profit of a private limited company whether depreciation
should be allowed as per Income-tax Rules or as per the Companies Act — Matter
referred to Larger Bench.


[Dynamic Orthopedics P. Ltd. v. CIT, (2010) 321 ITR
300 (SC)]

The appellant-assessee, a private limited company, was
engaged in the manufacture and sale of orthopedic appliances. In the return of
income filed, the assessee returned an income of Rs.1,50,730. In the profit and
loss account, depreciation was provided at the rates specified in Rule 5 of the
Income-tax Rules, 1962 (‘Rules’, for short). While completing the assessment of
income, the Assessing Officer recomputed the book profit for the purpose of S.
115J of the Income-tax Act, 1961, (‘Act’, for short), after allowing
depreciation as per the Schedule XIV to the Companies Act. The rates of
depreciation specified in Schedule XIV to the Companies Act, 1956 (‘1956 Act’,
for short) were lower than the rates specified under Rule 5 of the Rules.

Being aggrieved by the assessment order, the assessee took up
the matter before the Commissioner of Income-tax (Appeals) [‘CIT(A)’ for short],
who came to the conclusion that the assessee was a private limited company. It
was not a subsidiary of public company. Therefore, placing reliance on S. 355 of
the 1956 Act, the Commissioner of Income-tax (Appeals) held that S. 350 of the
1956 Act was not applicable to the assessee and, in the circumstances, the
Income-tax Officer had erred in providing depreciation at the rates specified
under Section Schedule XIV to the 1956 Act. Consequently, the Commissioner of
Income-tax (Appeals) held that the assessee was right in providing depreciation
in its accounts as per Rule 5 of the Rules.

Aggrieved by the decision of the Commissioner of Income-tax
(Appeals), appeal was preferred by the Department to the Income-tax Appellate
Tribunal (‘Tribunal’, for short). By judgment and order dated January 13, 1999,
the Tribunal held that since the assessee was a private limited company, S. 349
and S. 350 were not applicable to the facts of the case and, in the
circumstances, the Income-tax Officer had erred in directing the assessee, which
was private limited company, to provide for depreciation as per Schedule XIV to
the 1956 Act, which was not applicable to private limited companies (see S. 355
of the 1956 Act). Consequently, the appeal filed by the Department before the
Tribunal stood dismissed.

Aggrieved by the said decision of the Tribunal, the
Department preferred appeal before the High Court of Kerala which held that S.
115J of the Act was introduced in the A.Y. 1988-89. S. 115J of the Act read with
Explanation (iv), as it stood at the material time, was a piece of legislation
by incorporation and, consequently, the provisions of S. 205 of the 1956 Act
stood incorporated into S. 115J of the Act, hence, the Income-tax Officer was
right in directing the assessee to provide for depreciation at the rate
specified in Schedule XIV to the 1956 Act and not in terms of Rule 5 of the
Rules.

On a civil appeal being filed by the assessee, the Supreme
Court observed that the view of the High Court, in the present case, was similar
to view taken by it in the case of CIT v. Malayala Manorama Co. Ltd. reported in
(2002) 253 ITR 378 (Ker.), which High Court’s judgment stood reversed by the
judgment of the Supreme Court in the case of Malayala Manorama Co. Ltd. v. CIT
reported in (2008) 300 ITR 251.

However, the Supreme Court was of the view that its judgment
in Malayala Manorama Co. Ltd. v. CIT reported in (2008) 300 ITR 251 needed
reconsideration for the following reasons : Chapter XII-B of the Act containing
‘Special provisions relating to certain companies’ was introduced in the
Income-tax Act, 1961, by the Finance Act, 1987, with effect from April 1, 1988.
In fact, S. 115J replaced S. 80VVA of the Act. S. 115J (as it stood at the
relevant time), inter alia, provided that where the total income of a company,
as computed under the Act in respect of any accounting year, was less than
thirty per cent of its book profit, as defined in the Explanation, the total
income of the company, chargeable to tax, shall be deemed to be an amount equal
to thirty per cent of such book profit. The whole purpose of S. 115J of the Act,
therefore, was to take care of the phenomenon of prosperous ‘zero tax’ companies
not paying taxes though they continued to earn profits and declare dividends.
Therefore, a minimum alternate tax was sought to be imposed on ‘zero tax’
companies. S. 115J of the Act imposes tax on a deemed income. S. 115J of the Act
is a special provision relating only to certain companies. The said Section does
not make any distinction between public and private limited companies. In our
view, S. 115J of the Act legislatively only incorporates the provisions of Parts
II and III of Schedule VI to the 1956 Act. Such incorporation is by a deeming
fiction. Hence, we need to read S. 115J(1A) of the Act in the strict sense. If
we so read, it is clear that, by legislative incorporation, only Parts II and
III of Schedule VI to the 1956 Act have been incorporated legislatively into S.
115J of the Act. If a company is a MAT company, then be it a private limited
company or a public limited company, for the purposes of S. 115J of the Act, the
assessee-company has to prepare its profit and loss account in accordance with
Parts II and III of Schedule VI to the 1956 Act alone. If the judgment in
Malayala Manorama Co. Ltd. (2008) 300 ITR 251 is to be accepted, then the very
purpose of enacting S. 115J of the Act would stand defeated, particularly, when
the said Section does not make any distinction between public and private
limited companies. It needs to be reiterated that, once a company falls within
the ambit of it being a MAT company, S. 115J of the Act applies and, under that
Section, such as assessee-company was required to prepare its profit and loss
account only in terms of Part II and III of Schedule VI to the 1956 Act. The
reason being that rates of depreciation in Rule 5 of the Income-tax Rules, 1962,
are different from the rates specified in Schedule XIV to the 1956 Act. In fact,
by the Companies (Amendment) Act, 1988, the linkage between the two has been
expressly de-linked. Hence, what is incorporated in S. 115J is only Schedule VI,
and not S. 205 or S. 350 or S. 355. This was the view of the Kerala High Court
in the case of ACIT v. Malayala Manorama Co. Ltd. reported in (2002) 253 ITR
378, which has been wrongly reversed by the Supreme Court in the case of
Malayala Manorama Co. Ltd. v. CIT reported in (2008) 300 ITR 251.

For the aforesaid reasons, the Registry was directed to place
the civil appeal before the learned Chief Justice for appropriate directions as
the Bench was of the view that the matter needed reconsideration by a larger
Bench of the Supreme Court.

 

levitra

Assessment — Reference to Departmental Valuer

New Page 2

14. Assessment — Reference
to Departmental Valuer.


[Sargam Cinema v. CIT,
(2010) 328 ITR 513 (SC)]

The Supreme Court observed
that the Tribunal was right in coming to the conclusion that the assessing
authority could not have referred the matters to the Departmental Valuation
Officer (DVO) without the books of account being rejected. In the circumstances,
reliance could not have been placed on the report of the DVO. The Supreme Court
set aside the order of the High Court as that aspect had not been considered by
it and restored the order of the Tribunal.

 

levitra

Settlement of cases — Settlement Commission — S. 234B applies to the proceedings of the Settlement Commission — The terminal point for levy of such interest is the date of the order u/s.245D(1) — The Settlement Commission cannot reopen its concluded proce

New Page 2

 13. Settlement of cases —
Settlement Commission — S. 234B applies to the proceedings of the Settlement
Commission — The terminal point for levy of such interest is the date of the
order u/s.245D(1) — The Settlement Commission cannot reopen its concluded
proceedings by invoking S. 154 so as to levy interest u/s.234B, though it was
not done in the original proceedings.


[Brij Lal & Ors. v. CIT,
(2010) 328 ITR 477 (SC)]

Vide referral orders dated
14-12-2004 and 20-1-2005 certain questions were referred to the Constitution
Bench of the Supreme Court and accordingly a Constitution Bench consisting of
five Judges was constituted to consider the same.

After hearing both the
sides, the Supreme Court reframed the questions for the sake of convenience as
under :

(i) Whether S. 234B
applies to the proceedings of the Settlement Commission under chapter XIXA of
the Act ?

(ii) If the answer to the
above question is in affirmative, what is the terminal point for levy of such
interest — Whether such interest should be computed up to the date of the
order u/s.245D(1) or up to the date of the order of the Commission u/s.245D(4)
?

(iii) Whether the
Settlement Commission could reopen its concluded proceedings by involving S.
154 of the said Act so as to levy interest u/s.234B, though it was not so done
in the original proceedings ?

The Supreme Court held that
in the special procedure to be followed by the Settlement Commission u/s.245C
and u/s.245D, the returned income plus income disclosed would result in
computation of total income which is the basis of levy of tax on the undisclosed
income, which is nothing but ‘assessment’ which takes place at S. 245D(1) stage.
In that computation, one finds that the provisions dealing with a regular
assessment, self-assessment and levy and computation of interest for default in
payment of advance tax, etc. are engrafted [S. 245C(1B), S. 245C(1C), S.
245D(6), S. 245F(3) in addition to S. 215(3), S. 234A(4), and S. 234B(4)].

The Supreme Court further
held that till the Settlement Commission decides to admit the case u/s. 245D(1)
the proceedings under the normal provisions remain open. But once the Commission
admits the case after being satisfied that the disclosure is full and true, then
the proceedings commence with the Settlement Commission. In the meantime, the
applicant has to pay the additional amount of tax with interest without which
the application is not maintainable. Thus, interest u/s. 234B would be payable
up to the stage of S. 245D(1).

The Supreme Court also
considered as to what happens in the cases where 90% of the assessed tax is paid
but on the basis of the Commission’s order u/s.245D(4) and the advance tax paid
turns out to be less than 90% of the assessed tax as defined in the Explanation
to S. 234B(1). The Supreme Court held that there were two distinct stages under
chapter XIX-A and the Legislature has not contemplated the levy of interest
between the order u/s.245D(1) stage and S. 245D(4) stage. The interest u/s.234B
will be chargeable till the order of the Settlement Commission u/s. 245D(1);
i.e., admission of the case. The expression ‘interest’ in S. 245(6A) fastens the
liability to pay interest only when the tax payable in pursuance of an order
u/s.245D(4) is not paid within the specified time and which levy is different
from liability to pay interest u/s.234B or u/s.245D(2C).

The Supreme Court further
held that u/s.245-I, the order of the Settlement Commission is made final and
conclusive on matters mentioned in the application for settlement except in the
two reopened cases of fraud and misrepresentation in which case the matter could
be by way of review or recall. Like the Income-tax Appellate Tribunal, the
Settlement Commission is a quasi-judicial body. U/s.254(2), the Income-tax
Appellate Tribunal is given the power to rectify, but no such power is given to
the Settlement Commission. The Supreme Court therefore held that the Settlement
Commission cannot reopen its concluded proceedings by invoking S. 154 of the
Act. The Supreme Court further held that even otherwise, invocation of S. 154 on
the facts of the cases was not justified as there was lot of controversy as to
whether the Settlement Commission had power to reduce or waive interest and also
on the question of terminus.

 

levitra

Question of Law — Investment allowance — Whether allowable in one year or in several years is a question of law — Decision of Madras High Court not applicable.

New Page 1

14 Question of Law — Investment allowance — Whether allowable
in one year or in several years is a question of law — Decision of Madras High
Court not applicable.


[CIT v. Lucas TVS Ltd., (2008) 297 ITR 429 (SC)]

The Assessing Officer was of the view that investment
allowance u/s.32A is only to be allowed in one assessment year and not in
several assessment years. The appeal related to the A.Ys. 1989-90, 1991-92 and
1992-93. The Tribunal held otherwise. The High Court dismissed the appeal in
view of its decision in Southern Asbestos Cement Ltd v. CIT, (2003) 259
ITR 631 (Mad.) in which it was held that the investment allowance in respect of
the incremental cost of the machinery, necessitated by the fluctuation in
foreign exchange rates is allowable to the assessee in the respective years in
which cost arose in view of S. 43A(1) of the Act.

On an appeal, the parties conceded before the Supreme Court
that S. 43A(1) relates to fluctuations of foreign exchange and its effect on the
valuation of the assets and that it had nothing to do with the question as to
whether it is allowable in one year and therefore the decision of the High Court
had no application. In that view of the matter, the Supreme Court set aside the
order of the High Court and remitted the matter for fresh adjudication after
formulating the question of law involved.


levitra

Writ petition — Dispute between Government Undertaking and Union of India could be ordinarily proceeded with only after receipt of permission of COD — As the matter was covered by decision of Supreme Court, as an exception, High Court was directed to deci

New Page 2

  1. Writ petition — Dispute between Government Undertaking and
    Union of India could be ordinarily proceeded with only after receipt of
    permission of COD — As the matter was covered by decision of Supreme Court, as
    an exception, High Court was directed to decide the matter on merits.

[Delhi Development Authority and Anr. v. UOI & Ors.,
(2009) 314 ITR 342 (SC)]

By a writ petition the Delhi Development Authority (DDA)
sought to challenge an order dated 9-9-2005 of the Addl. CIT, Rg. 32, New
Delhi requiring the petitioner to get the accounts of DDA audited u/s.142(2A)
of the Act. According to the petitioner, it had not applied for the COD
clearance as it was not required since the dispute was frivolous and in
support of its contention reliance was placed on the decision of the Supreme
Court in Canara Bank v. National Thermal Power Corporation, (2001) 1
SCC 43, (2001) 104 Comp. Cas. 97.

The Delhi High Court however held that it was not possible
at the admission stage to arrive at the conclusion that the dispute raised was
a frivolous one as was sought to be contended. According to the High Court the
decision in the Canara Bank’s case turned on its own facts and was
distinguishable. The Delhi High Court dismissed the petition since the
petitioner had not within one month of the filing of the writ petition,
applied to the COD for permission to litigate. It was however clarified that
the time spent in the litigation would not be counted towards the period of
completion of the assessment and also that the petitioner was not precluded
from approaching the COD for resolution of the dispute.

On appeal the Supreme Court observed that ordinarily it
would not have differed with the view taken by the High Court, but as the
matter was covered by the decision in Rajesh Kumar v. Dy. CIT, (2006)
287 ITR 91 (SC), it directed the High Court to consider the writ petition
filed by the petitioner on merits.

levitra

Foreign Exchange Regulation Act— Contravention of provisions of Act — Adjudication proceedings and criminal prosecution can be launched simultaneously — If the exoneration in the adjudication proceedings is on merits criminal prosecution on same set of facts cannot be allowed.

Foreign Exchange Regulation Act— Contravention of provisions of Act — Adjudication proceedings and criminal prosecution can be launched simultaneously — If the exoneration in the adjudication proceedings is on merits criminal prosecution on same set of facts cannot be allowed.

[Radheshyam Kejriwal v. State of West Bengal and Anr., (2011) 333 ITR 58 (SC)]

On 22nd May, 1992 various premises in the occupation of the appellant Radheshyam Kejriwal besides other persons were searched by the officers of the Enforcement Directorate. The appellant was arrested on 3rd May, 1992 by the officers of the Enforcement Directorate in exercise of the power u/s.35 of the Foreign Exchange Regulation Act, 1973 (hereinafter referred to as the ‘Act’) and released on bail on the same day. Further the appellant was summoned by the officers of the Enforcement Directorate to give evidence in exercise of the power u/s.40 of the Act and in the light thereof his statement was recorded on various dates, viz., 22nd May, 1992, March 10, 1993, March 16, 1993, 17th March, 1993 and 22nd March, 1993. On the basis of materials collected during search and from the statement of the appellant it appeared to the Enforcement Directorate that the appellant, a person resident in India, without any general or specific exemption from the Reserve Bank of India made payments amounting to Rs.24,75,000 to one Piyush Kumar Barodia in March/April, 1992 as consideration for or in association with the receipt of payment of U.S. $ 75,000 at the rate of Rs.33 per U.S. dollar by the applicant’s nominee abroad in Yugoslavia. It further appeared to the Enforcement Directorate that the transaction involved conversion of Indian currency into foreign currency at rates of exchange other than the rates for the time being authorised by the Reserve Bank of India. In the opinion of the Enforcement Directorate the act of the appellant in making the aforesaid payment of Rs.24,75,000 in Indian currency at the rate of Rs.33 per U.S. dollar against the official rate of dollar, i.e., Rs.30 per dollar (approximately), contravened the provisions of section 8(2) of the Act. Further the said payment having been made without any general or special exemption from the Reserve Bank of India, the appellant had contravened the provisions of section 9(1)(f) of the Act and accordingly rendered himself liable to imposition of penalty u/s.50 of the Act. The Enforcement Directorate was further of the opinion that by abetting in contravening the pro-visions of sections 9(1)(f)(i) and 8(2) of the Act read with the provisions of section 64(2) of the Act, the appellant had rendered himself liable for penalty u/s.50 of the Act.

Accordingly, a show-cause notice dated 7th May, 1993 was issued by the Special Director of the Directorate of Enforcement calling upon the appellant to show cause as to why adjudication proceedings as contemplated u/s.51 of the Act be not held against him for the contraventions pointed above. Show-cause notice dated 7th May, 1993 referred to above led to institution of proceedings u/s.51 of the Act (hereinafter referred to as the ‘adjudication proceedings’). The Adjudication Officer came to the conclusion that the allegation made against the appellant of contravention of the provisions of sections 8, 9(1)(f)(i) and 8(2) of the Act read with section 64(2) of the Act could not be sustained. According to the Adjudication Officer, it had not been proved beyond reasonable doubt that a sum of Rs.24,75,000 had been actually paid, since there was no documentary evidence except the statement of Shri Piyush Kumar Barodia and a retracted statement of Shri Radheshyam. Since the Enforcement Directorate had not challenged the adjudication order it had become final.

Since any person contravening the provisions of section 8 and 9 of the Act besides other provisions is liable to be prosecuted u/s.56, a notice for prosecution came to be issued on 29-12-1994. After hearing, a complaint was lodged before the Metropolitan Magistrate. The application of the appellant for dropping the prosecution inter alia on the ground that on the same allegation the adjudication proceedings have been dropped was rejected by the Metropolitan Magistrate by his order dated 2-9-1997. The criminal revision application before the Calcutta High Court was rejected by an order dated 10-8-2001.

On further appeal, the Supreme Court observed that the ratio of various decisions on the subject could be broadly stated as follows:

(i)    Adjudication proceedings and criminal prosecution can be launched simultaneously;

(ii)    Decision in adjudication proceedings is not necessary before initiating criminal prosecution.

(iii)    Adjudication proceedings and criminal proceedings are independent in nature to each other;

(iv)    The finding against the person facing prosecution in the adjudication proceeding is not binding on the proceedings for criminal prosecution;

(v)    An adjudication proceeding by the Enforcement Directorate is not a prosecution by a competent court of law to attract the provisions of Article 20(2) of the Constitution or section 300 of the Code of Criminal Procedure;

(vi)    The finding in the adjudication proceedings in favour of the person facing trial for identical violation will depend upon the nature of the finding. If the exoneration in the adjudication proceedings is on technical ground and not on the merits, prosecution may continue; and

(vii)    In case of exoneration, however, on the merits where the allegation is found to be not sustainable at all and the person held innocent, criminal prosecution on the same set of facts and circumstances cannot be allowed to continue, the underlying principle being the higher standard of proof in criminal cases.

In the opinion of the Supreme Court, therefore, the yardstick would be to judge as to whether the allegation in the adjudication proceedings as well as the proceeding for prosecution is identical and the exoneration of the person concerned in the adjudication proceeding is on the merits. In case it is found on the merits that there is no contravention of the provisions of the Act in the adjudication proceeding, the trial of the person concerned shall be in abuse of the process of the Court.

Bearing in mind the principles aforesaid, the Supreme Court proceeded to consider the case of the appellant. The Supreme Court noted that in the adjudication proceedings, on the merits the adjudicating authority had categorically held that the charges against Shri Radheshyam Kejriwal for contravening the provisions of section 9(1)(f)(i) and section 8(2) r.w.s. 64(2) of the Foreign Exchange Regulation Act, 1973 could not be sustained. The Supreme Court held that in the face of the aforesaid finding by the Enforecement Directorate in the adjudication proceedings that there is no contravention of any of the provisions of the Act, it would be unjust and an abuse of the process of the Court to permit the Enforcement Directorate to continue with the criminal prosecution. In the result, the Supreme Court by majority allowed the appeal and set aside the judgment of the learned Metropolitan Magistrate and the order affirming the same by the High Court and the appellant’s prosecution was quashed.

However, in a dissenting judgment separately delivered by P. Sathasivam J., it was held that considering the interpretation relating to sections 50, 51 and 56 by various decisions, in a statute relating to economic offences, there was no reason to restrict the scope of any provisions of the Act. These provisions ensured that no economic loss was caused by the alleged contravention by the imposition of an appropriate penalty after adjudication u/s.51 of the Act and to ensure that the tendency to violate is guarded by imposing appropriate punishment in terms of section 56 of the Act. Section 23D of the Foreign Exchange Regulation Act, 1947 had a proviso which indicated that the adjudication for the imposition of penalty should precede making of complaint in writing to the Court concerned for prosecuting the offender. The absence of a similar proviso to section 51 or to section 56 of the present 1973 Act was a clear indication that the Legislature intended to treat the two proceedings as independent of each other. There was nothing in the present Act to indicate that a finding in adjudication is binding on the Court in a prosecution u/s.56 of the Act or that the prosecution u/s.56 depends upon the result of adjudication u/s.51 of the Act. The two proceedings were independent and irrespective of the outcome of the decision u/s.50, there could not be any bar in initiating prosecution u/s.56. The scheme of the Act made it clear that the adjudication by the concerned authorities and the prosecution were distinct and separate. It was further held that no doubt, the conclusion of the adjudication, in the case on hand, the decision of the Special Director dated 18th November, 1996 may be a point for the appellant and it is for him to put forth the same before the Magistrate. Inasmuch as the FERA contains certain provisions and features which cannot be equated with the provisions of the Income-tax Act or the Customs Act and in the light of the mandate of section 56 of the FERA, it is the duty of the Criminal Court to discharge its functions vested with it and give effect to the legislative intention, particularly, in the context of the scope and object of the FERA which was enacted for the economic development of the country and augmentation of revenue. Though the Act has since been repealed and is not applicable at present, those provisions cannot be lightly interpreted taking note of the object of the Act.

In view of the above analysis and discussion, the dissenting Judge agreed with the conclusion arrived at by the Metropolitan Magistrate, Calcutta as well as the decision of the High Court.