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Housing project: Deduction u/s. 80-IB: A. Ys. 2004-05 to 2008-09: Built-up area of some flats exceeding 1500 sq.ft.: Within a composite housing project, where there are eligible and ineligible units, the assessee can claim deduction in respect of eligible units in the project and even within the block, the assessee is entitled to claim proportionate relief in the units satisfying the extent of the built-up area

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Viswas Promoters (P) Ltd. vs. ACIT; 255 CTR 149 (Mad)

The assessee was engaged in the business of development and construction of flats. The assessee was eligible for deduction u/s. 80-IB(10). Out of its four projects, two projects had all the flats of the specified built-up area less than 1500 sq.ft. In respect of these two projects, the Assessing Officer allowed the claim for deduction u/s. 80-IB(10) of the Act. In the remaining two projects, there were 32 flats of built-up area more than 1500 sq.ft. in one project and one flat of built up area more than 1500 sq. ft. in the other project. The assessee claimed deduction u/s. 80-IB(10) in respect of these two projects on proportionate basis corresponding to the flats of built-up area of less than 1500 sq. ft. The Assessing Officer disallowed the claim in respect of these two projects, on the ground that the condition as regards the built-up area of the flats is not satisfied. The CIT(A) allowed the assessee’s claim. The Tribunal upheld the decision of the Assessing Officer. On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held as under:

“i) Going by the definition of the “housing project” under Explanation to section 80HHBA as the construction of “any building” and the wordings in section 80-IB(10), the question of rejection in entirety of the project on account of any one of the blocks not complying with the conditions, does not arise.

ii) In respect of each of the blocks, the assessee is entitled to have the benefit of deduction in respect of residential units satisfying the requirement of built up area of 1500 sq.ft. u/s. 80-IB(10)(c). The assessee would be entitled to the relief on a proportionate basis.”

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Deduction u/s. 80JJA: A. Ys. 2003-04 and 2004- 05: Business of making fuel briquettes from bagasse: Bagasse is a biodegradable waste and the same is collected on consideration by assessee from sugar factory: Assessee entitled to deduction u/s. 80JJA

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CIT vs. Smt. Padma S. Bora; 255 CTR 1 (Bom)

Assessee was engaged in the business of manufacturing fuel briquettes from bagasse purchased from sugar factory for consideration. For the A. Ys. 2003- 04 and 2004-05, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80JJA of on the following grounds:

“i) Bagasse is not a waste;

ii) It is not generated in municipal/urban limits i.e., by local authorities;

iii) It is not collected but it is purchased; and

 iv) The process does not involve any treatment or recycling of a biodegradable waste.

The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) Bagasse is a biodegradable waste and the same is collected on consideration by the assessee from the sugar factory. Term “waste” has to be understood contextually i.e., place where it arises and the manner in which it arises during the processing of some article. The fact that the sugar industry regards bagasse as waste is evident from circular dated 4-2-2006, issued by the Sugar Commissioner, Maharashtra State. Besides, the ITC classification of Exim Policy also classifies bagasse as a waste of sugar industry under Chapter 23, Heading 23.20 thereof. Further, Central Excise Teriff Act, 1985 also regards bagasse as waste of sugar manufacture and has classified the same under Chapter 23, Heading 23.01.

ii) Contention of the Revenue that collection means collecting free of charge and not by purchasing is not tenable. Word “collecting” means to gather or fetch. It is a neutral word and does not mean collection for consideration or collection without consideration. In the instant case, the assessee has collected bagasse from sugar factories after making payment for the same. Thus, the requirement of collecting biodegradable waste as provided u/s. 80JJA is satisfied.

iii) Circular No. 772 dated 23rd December, 1998 does not restrict its benefits only to local bodies. In any event, the circular cannot override the clear words of section 80JJA which provides deduction in respect of profits and gains derived from the business of collecting and processing/treating of biodegradable waste for making briquettes for fuel.

iv) Therefore, Tribunal was justified in allowing deduction u/s. 80JJA on the profits derived from the business of manufacturing fuel briquettes from bagasse.”

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Charitable or religious trust: Section 11: A. Ys. 1998-99 to 2000-01: Exemption of income from property held under trust: Accumulation of income: For purposes of section 11(2), Form No. 10 could be furnished during reassessment proceedings

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Association of Corporation & Apex Societies of Handlooms vs. Asst. DIT; 30 Taxman.com 22 (Del)

The Tribunal rejected the assessee’s claim for accumulation of income u/s. 11(2) of the Income Tax Act, 1961 on the ground that Form No. 10 had not been furnished along with the return, but was filed during the course of reassessment proceedings.

On appeal by the assessee, the assessee contended as under:

“i) The assessment included reassessment as was evident from section 2(8).

ii) Whether the assessment was an original assessment or a part of reassessment, it would not make any difference and it would be entitled to file Form No. 10 in either of the two proceedings and the revenue would have to take the said form into account.

The contention of the Department was that in view of the judgment of the Supreme Court rendered in the case of CIT vs. Nagpur Hotel Owners Association [2001] 247 ITR 201/ 114 Taxman 255 (SC) during reassessment proceedings the Form No. 10 could not be furnished by an assessee.

The Delhi High Court reversed the decision of the Tribunal, allowed the assessee’s appeal and held as under:

“i) One has to keep in mind the fact that while reopening of an assessment cannot be asked for by the assessee on the ground that it had not furnished Form No. 10 during the original assessment proceedings, this does not mean that when the revenue reopens the assessment by invoking section 147, the assessee would be remediless and would be barred from furnishing Form No. 10 during those assessment proceedings.

ii) Therefore, Form No. 10 could be furnished by the assessee-trust during the reassessment proceedings.”

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Deemed income: section 41(1): A.Y. 1995-96: Cheques not presented by creditors within validity period: No remission of liability: Amount not assessable u/s.41(1).

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For the A.Y. 1995-96, the assessee credited to its profit and loss account a sum of Rs.5,02,646 as liabilities no longer required to be written back since the cheques for the amounts issued to the creditors were not presented within the validity period. The assessee claimed that the sum is liable to be excluded from the profit and could not be taxed u/s.41(1) of the Income-tax Act, 1961. The Assessing Officer treated the amount as the assessee’s income u/s.41(1) of the Act. The Commissioner (Appeals) and the Tribunal upheld the addition.

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

“(i) The words ‘obtained, whether in cash or in any other manner, whatsoever, any amount in respect of such loss or expenditure’ incurred in any previous year in section 41(1)(a) of the Income-tax Act, 1961, refers to the actual receiving of cash of that amount. The amount may be actually received or it may be adjusted by way of any adjustment entry or a credit note or in any other form when the cash or the equivalent of the cash can be said to have been received by the assessee. But it must be the obtaining of the actual amount which is contemplated by the Legislature when it used the words ‘has obtained, whether in cash or in any other manner, whatsoever, any amount in respect of such loss or expenditure in the past’.

(ii) The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee’s case alone, but has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of debt even after expiry of the normal period of limitation as provided in the limitation Act.

(iii) It has not been established that due to nonencashment of cheques in question, the money involved had become the money of the assessee because of limitation or by any other statutory or contractual right. The amount was not assessable u/s.41(1).”

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Bad debts: Deduction u/s. 36(1)(vii): A. Y. 2004- 05: Where books of account are not closed and not signed by Board of Directors and not adopted by shareholders as per Companies Act, it is legally permissible to make adjustments before they are finally adopted: Where accounts of assessee were open and subject to correction by auditors, bad debts could be written off even after closure of accounting period, as there is neither any condition nor any provision u/s. 36(1)(vii), that writing off of

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CIT vs. U.P. Rajkiya Nirman Nigam Ltd.; [2013] 36 taxmann.com 96 (All):

For the A. Y. 2004-05, the assessee’s claim for deduction of bad debts u/s. 36(1)(vii) of the Income-tax Act, 1961 was disallowed by the Assessing Officer on the ground that the decision to write off bad debt was not taken in the relevant previous year. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the following questions were raised before the High Court:

“i) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that assessee can keep his accounts open for an indefinite period and pass an entry at a later stage even after 12 months from the closure of the accounting period?

ii) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in allowing the claim of bad debts of the assessee on the ground that it has been written off in the accounts of the relevant previous year while failing to appreciate that decision to write off bad debt was not taken in the relevant previous year and the same were actually not done in the previous year by 31st March?”

The Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) On perusal of the provisions, it reveals that the only requirement for allowing the bad debt u/s. 36 (1) (vii) of the Income-tax Act, is that any bad debt or part thereof is written off as irrecoverable and secondly, they should be written off in the accounts of the assessee for the previous year. In the instant appeal, neither the department nor the assessee disputes that the debt had become bad and it was written off.

ii) The prescription as provided is to write off bad debt by the assessee in the accounts ‘for the previous year’, but it does not say to write off bad debt ‘in the previous year’. Thus, there is a vast difference if the word ‘in’ would have been there in place of ‘for’. Further, the words ‘accounts of the assessee’ are qualified with further words ‘for the previous year’. Thus, it only means that the accounts in which the Act of writing off is to be done by the assessee should be for the previous year. Therefore, the law requires to write off the bad debt in the accounts of the assessee in the relevant accounting year. There is neither any condition nor any provision that the writing off should be done in the previous year, i.e. before end of the financial year.

iii) In the present case, debts relating to the period 1987-88 and 1998-99 claimed in the accounts which were prepared up to 31-03-2004 and as the accounts of the assessee are open and subject to corrections by the Auditors, as per the Companies Act, then such writing off can be done in those account books. No new legal proposition has been brought to our notice for treating the debt as bad or irrecoverable should be taken in the previous year itself. In other words, where account books are not closed and not signed by the Board of Directors and not adopted by the shareholders as per the Companies Act, it is legally permissible to make adjustments before they are finally adopted.

iv) Further, it is admitted that the original return, on the basis of unaudited accounts, was filed on 01-11-2004. After audit had taken place and report of the Auditors was accepted, revised return was filed on 18-08-2005 and it is only in the revised return, the debts to the tune of Rs. 2 crore and odd had been declared as bad. The ground taken by the Assessing Authority and Appellate Authority for not accepting the said bad debts during the assessment year under consideration, i.e. 2004-05 is contrary to the provisions of section 36 (1) (vii) of the Income-tax Act, and further in view of the interpretation as stated here-in-above. Therefore, the Tribunal has rightly allowed the appeal of the assessee.

v) In view of above, the questions are answered in the negative, i.e., against the Revenue and is in favour of the assessee.”

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Appellate Tribunal: Power and scope: Section 80-IA: A. Ys. 2002-03 to 2008-09: CIT(A) holding rental income from towers constructed in industrial park was business income and eligible for deduction u/s. 80-IA: Revenue not challenging this finding before Tribunal: Tribunal cannot pass remand order for further enquiry on issue of character of receipt:

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R. R. Industries Ltd. vs. ITO; 356 ITR 97 (Mad):

The assessee constructed towers in the industrial park and let them out to software concerns providing a platform with plug and play infrastructure. It claimed deduction u/s. 80-IA of the Income-tax Act, 1961, treating the rental income as business income. The Assessing Officer assessed the income as income from house property and disallowed the assessee’s claim for deduction u/s. 80-IA. The Commissioner (Appeals) held that the assessee had complied with section 80-IA(4)(iii) and accordingly was eligible for deduction u/s. 80-IA. He held that the income received by the assessee was to be assessed as income from business. He also agreed in principle that the deduction u/s. 80-IA would be allowed, even if the rental income was assessed as income from house property.

Before the Tribunal the Revenue challenged the view of the Commissioner (Appeals) only on his holding the income derived from letting out of industrial park buildings as income from business as against the finding made by the Assessing Officer that it was to be treated as income from house property. No question was raised on the view of the Commissioner (Appeals) that irrespective of the character of the receipt, the deduction was available. On considering the nature of the receipt, the Tribunal agreed with the submission of the assessee that income derived by developing and operating or maintaining an industrial park was assessable under the head “profits and gains of business and profession” as could be inferred from the provisions of section 80-IA(4)(iii) of the Act. The Tribunal held that the assessee as well as the Revenue had not brought out any materials to show that the facilities developed by the assessee after completion of the development was treated as an industrial park by any authority and it was not clear whether the alleged industrial park was so notified by the Central Government or not. In the absence of any material to show that what was predominant in the letting out in the building and whether the facilities were incidental, the Tribunal viewed that it was necessary to restore the issue back to the Assessing Officer for proper verification.

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

“i) When the Revenue had accepted the view of the Commissioner (Appeals) on section 80-IA that the assessee had complied with section 80-IA(4)(iii), nothing remained for an enquiry either as to the nature of the receipt or for that matter the facilities developed to be treated as an industrial park to consider the question of deduction u/s. 80-IA(4)(iii).

ii) The view of the Commissioner (Appeal) in this regard did not call for any interference. The Revenue did not challenge the order of the Commissioner on the section 80-IA deduction before the Tribunal.

iii) Thus, when the character of the receipt was not a question to be gone into in the matter of considering the claim of deduction u/s. 80-IA(4)(iii), no useful purpose would be served for the Revenue to again insist on a decision on the character of the receipt.

iv) The order of the Tribunal was set aside and the appeals filed by the assessee are allowed.”

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Software Technology Park: Exemption u/s. 10A: A. Y. 2003-04: Approval by Director of Software Parks of India is valid: Approval by Inter-Ministerial Standing Committee not necessary:

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CIT vs. Technovate E Solutions P. Ltd.; 354 ITR 110 (Del):

For the A. Y. 2003-04, the assessee claimed exemption u/s. 10A and furnished a registration issued by a director of the Software Technology Parks of India in support of the claim. The Assessing Officer rejected the claim on the ground that the approval of the director of the Software Technology Parks of India was not a valid approval from a specified authority. He held that only the Inter-Ministerial Standing Committee was competent to grant approval to units functioning within the Software Technology Park for the purposes of exemption u/s. 10A. The Tribunal allowed the assessee’s claim.

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

i) The CBDT in Instruction No. 1 of 2006, dated 31-03- 2006, clarified that the claim of deduction u/s. 10A should not be denied to the software technology park units only on the ground that the approval/ registration to such units had been granted by the Director of Software Technology Parks of India. In the Instruction, the Board also made a reference to the Inter-Ministerial communication dated 23-03-2006, issued by the Secretary, Minister of  Communications and Technologies to the effect that the approvals issued by the director of the Software Technology Parks of India had the authority of the Inter-Ministerial Standing Committee and that all approvals granted by director of the Software Technology Parks of India were, therefore, deemed to be valid.

ii) The position was also clear from a letter dated 6th May, 2009, issued by the Board to the Joint Secretary, Minister of Commerce and Industry wherein a distinction had been drawn between the provisions of sections 10A and 10B and in which it had been clarified that a unit approved by a director under the Software Technology Park Scheme would be allowed exemption only u/s. 10A as a software technology park unit and not u/s. 10B as 100% export oriented unit.

iii) Therefore, approval granted by the director of the Software Technology Parks of India would be deemed to be valid in as much as the directors were functioning under the delegated authority of the Inter-Ministerial Standing Committee.

iv) Thus the Tribunal was right in coming to the conclusion that the approval granted by the director of the Software Technology Parks of India was sufficient approval so as to satisfy the conditions relating to approvals u/s. 10A.”

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Reassessment: Reason to believe: Change of opinion: S/s. 147 and 148: A. Y. 2007-08: Information regarding bogus companies engaged in providing accommodation entries to which assessee was allegedly a beneficiary was in possession of AO while making assessment u/s. 143(3): In response to query raised by AO the assessee furnished all information including alleged accommodation entry providers with their confirmations: Subsequent notice u/s. 148 and the consequent reassessment are not valid:

Pardesi Developers & Infrastructure (P) Ltd. vs. CIT: 258 CTR 411 (Del):

For the A. Y. 2007-08, the assessment was originally completed by an order u/s. 143(3) dated 30-12-2009. Subsequently, a notice u/s. 148 dated 30-08-2011 was issued for reopening the assessment. The Delhi High Court allowed the writ petition challenging the notice and held as under:

“i) It is an admitted position that the information regarding the alleged accommodation entry providers had been circulated to all the AOs on 30-04-2009 which included the AO of the assessee. In other words, the AO of the assessee had received the said information with regard to the alleged accommodation- entry providing companies. Thereafter, on 09-11-2009, the assessee furnished a reply to the questioner which had been issued on 18-02-2009. In that reply, the assessee gave details of share capital raised by the assessee. These details included the sums received from the alleged accommodationentry providers. Along with the said reply dated 09-11-2009, confirmations from the said parties were also furnished. A similar reply was again furnished on 27-11-2009. Despite the furnishing of these details, the AO, in order to further verify and confirm the said facts, issued notices u/s. 133(6) to the said companies directly, on 27-30th November 2009. All the concerned parties responded to those notices and affirmed their respective confirmations, which they had earlier provided to the AO. It is only subsequent thereto that the assessment was framed.

ii) In the backdrop of these facts, it is difficult to believe the plea taken in the purported reasons that the said information was “neither available with the Department nor did the assessee disclose the same at the time of assessment proceedings”. From the aforesaid facts it is clear that the information was available with the Department and it had been circulated to all the AOs. There is nothing to show that the AO did not receive the said information. And, there is nothing to show that the AO had not applied his mind to the information received by him. On the contrary, it is apparent because he was mindful of the said information that he issued notices u/s. 133(6) directly to the parties to confirm the factum of application of shares and the source of funds of such shares.

iii) Therefore, the very foundation of the notice u/s. 148 is not established even ex facie. Consequently, it cannot be said that the AO had the requisite belief u/s.147 and, as a consequence, the impugned notice dated 30-08-2011 and the order on objections dated 03-08-2012 are liable to be quashed.”

Reassessment: S/s. 147 and 148: A. Y. 2000-01: Notice u/s. 148 at the instance of the audit party: Not valid:

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Gujarat Fluorochemicals Ltd. vs. ACIT; 353 ITR 398 (Guj):

For the A. Y. 2000-01, the assessment was originally completed u/s. 143(3). Subsequently, a notice u/s. 148 was issued at the instance of the audit party.

The Gujarat High Court allowed the writ petition filed by the assessee challenging the validity of the notice and held as under:

“i) Though an audit objection may serve as information, on the basis of which the Income-tax Officer can act, ultimate action must depend directly and solely on the formation of belief by the Income-tax Officer on his own.

ii) It was contended on behalf of the assessee that the Assessing Officer held no independent belief that income chargeable to tax had escaped assessment. He submitted that the Assessing Officer was under compulsion by the audit party to issue for reopening of assessment though she herself held a firm belief that no income had escaped assessment. The assessing Officer in her affidavit did not deny this.

iii) In the affidavit what was vaguely stated was that the Department was apprehensive about the source of information on the basis of which such averments were made. Inter-departmental correspondence was strictly confidential. On a direction from the Court the Revenue made a candid statement that the file containing exchanges between the Assessing Officer and the audit party was not traceable.

iv) The Revenue not having either denied the clear averments of the asessee made in the petition on oath nor having produced the original files to demonstrate the independent formation of the opinion by the Assessing Officer though sufficient time was made available, the issue stood firmly concluded in favour of the assessee. The reassessment notice was not valid.”

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Income: Lottery: Sections 2(24)(ix) and 115BB : Assessee was allotted a Contessa car as the first prize under the National Savings Scheme: Not a lottery: Not income liable to tax:

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CIT vs. Dr. S. P. Suguna Seelan; 353 ITR 391 (Mad):

The assessee was allotted a Contessa car as the first prize under the National Savings Scheme. The Assessing Officer treated the prize as winnings from lotteries within the meaning of section 2(24) (ix), 1961, and subjected to the special rate u/s. 115BB. The Tribunal held that the prize won by the assessee was not covered by section 2(24)(ix) and allowed the assessee’s appeal.

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

“The car won by the assessee on draw of lots under the incentive scheme of the National Savings Scheme was not a lottery and was not liable to tax.”

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Deemed dividend: Section 2(22)(e): A.Y. 1999-00: Gratuitous loan deemed to be dividend: Shareholder permitting his immovable property to be mortgaged to bank enabling company to obtain loan: Loan by company to shareholder not deemed dividend.

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The assessee holding substantial shareholding in a private company permitted his immovable property to be mortgaged to the bank for enabling the company to take the benefit of loan. In spite of request of the assessee, the company was unable to release the property from mortgage. Consequently, the board of directors of the company passed a resolution authoring the assessee to obtain from the company interest-free deposit up to Rs.50,00,000 as and when required. In the A.Y. 1999-00, the assessee obtained from the company a sum of Rs.20,75,000 by way of security deposit. A sum of Rs.20,00,000 was subsequently returned by the assessee to the company. For the A.Y. 1999-00, the Assessing Officer added the sum of Rs.20,75,000 as deemed dividend u/s.2(22)(e) of the Income-tax Act, 1961. The Tribunal upheld the addition.

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

“(i) The phrase ‘by way of advance or loan’ appearing in sub-clause (e) of section 2(22) of the Incometax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares . . . . . ; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such shareholder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act.

(ii) Thus gratuitous loans or advance given by a company to those class of shareholders would come within the purview of section 2(22), but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.

(iii) For retaining the benefit of loan availed from the bank if decision was taken to give advance to the assessee, such decision was not to give gratuitous advance to its shareholder, but to protect the business interest of the company. The sum of Rs.20,75,000 could not be treated as deemed dividend.”

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Capital gain: Sections 10B and 50(2): A.Y. 1993- 94: Assessee eligible for exemption u/s.10B sold assets to sister concern after expiry of period of exemption. Purchase of assets of same rate of depreciation: Assessee entitled to benefit u/s.50(2).

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The assessee had an export-oriented unit. After expiry of the term of benefit u/s.10B, in the A.Y. 1993-94, the assessee transferred the unit to a closely held company. There was a difference of Rs.71,42,904 between the value of the assets, as shown in the balance sheet as on date of transfer and the value of the assets adopted by the company. The Assessing Officer treated the difference as short term capital gains without allowing the benefit u/s.50(2). The Tribunal confirmed the order of the Assessing Officer.

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

“(i) The assessee carried on the same line of business, both as an export undertaking as well as in domestic trade. The assessee made an addition of 25% in the block of assets, viz., plant and machinery, during the previous year. Given the fact that the depreciation in respect of the assets transferred and purchased carried the same rate of depreciation and, hence, fell under ‘block of assets’, the assessee was justified in his claim on capital gains, that with the cost of the machinery added to the written down value of the machinery and the sale of the machinery during the relevant previous year, he was entitled to relief u/s.50(2).

(ii) Going by the provisions u/s.10B, the Revenue would not be justified in treating the assets of an export-oriented unit in isolation on the expiry of the tax holiday period, particularly when section 10B(4)(iv) recognises deemed grant of the depreciation allowance during the currency of the tax holiday, which means that at the expiry of the period of five years, the written down value of the plant and machinery continues to be available for the business of the assessee, which goes for normal assessment under various provisions of the Act.”

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Business expenditure: Section 43B: In A.Y. 1996- 97 the assessee paid a sum of Rs.322.46 lakh on account of excise duty being the liability for the A.Y. 1997-98: Assessee is entitled to the deduction in the A.Y. 1996-97 in view of section 43B(a) r/w. Expl. 2.

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During the previous year relevant to the A.Y. 1996-97, the assessee paid a sum of Rs.322.46 lakh on account of excise duty, the liability for payment of which was incurred in the previous year relevant to the A.Y. 1997-98. Relying on the provisions of section 43B of the Income-tax Act, 1961, the assessee claimed the deduction of the said amount in the A.Y. 1996-97. The Assessing Officer disallowed the claim. The Tribunal upheld the disallowance.

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

“The assessee cannot be deprived of the benefit of deduction of excise duty actually paid during the previous year, although in advance, according to the method of accounting followed by him. Section 43B(a) r/w. Expln. 2 allows deduction in such cases.”

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Interest u/s.220(2): A.Y. 1994-95: Original assessment order set aside by Tribunal: Interest u/s.220(2) to commence after thirty days from the date of service of demand notice pursuant to fresh assessment order.

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For the A.Y. 1994-95, the assessment was completed u/s.143(3) of the Income-tax Act, 1961 on 28-2-1997 determining the total income at Rs.2.05 crores. By a demand notice dated 28-2-1997 a demand of Rs.1.76 crore was raised. The assessment order was set aside by the Tribunal. Fresh assessment order was passed on 24-12-2006 computing the income at Rs.44.88 lakhs and raising a demand of Rs.22.02 lakhs. The Assessing Officer held that the assessee was liable to pay interest u/s.220(2) of the Act commencing from the day after thirty days from the date of service of the original demand notice dated 28-2-1997. The CIT(A) and the Tribunal accepted the claim of the assessee that the liability to pay interest u/s.220(2) commences from the day after thirty days from the date of service of the demand notice dated 24-12-2006 pursuant to the fresh assessment order.

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

“(i) The argument of the Revenue is that even though the original assessment order dated 28-2-1997 was set aside by the ITAT, once the fresh assessment order is passed, the demands arising therefrom would relate back to the date of service of the original demand notice dated 28-2-1997.

(ii) We see no merit in the above contention. U/s.156 of the Act, service of the demand notice is mandatory. Section 220(2) of the Act provides that if the amount specified in any notice of demand u/s.156 is not paid within the period prescribed u/ss.(1) of section 220, then, the assessee shall be liable to pay simple interest at the rate prescribed therein.

(iii) As per section 220(1) of the Act, the assessee was liable to pay the demand within thirty days from the service of the demand notice dated 24-12-2006. It is only if the assessee fails to pay the amount demanded, within thirty days of service of the demand notice dated 24-12-2006, the assessee was liable to pay interest u/s.220(2) of the Act. If the liability to pay interest u/s.220(2) arises after thirty days of service of the demand notice dated 24-12-2006, the question of demanding interest for the period prior to 24-12-2006 does not arise at all.

(iv) From the facts of the present case, the decision of the ITAT in holding that the assessee is liable to pay interest u/s.220(2) of the Act, from the end of thirty days after the service of notice of demand dated 24-12-2006 till the date on which the amount demanded was paid cannot be faulted.”

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Capital gains: Exemption u/s.54F: Purchase of two adjacent flats, interconnected and used as one residential house: Assessee entitled to exemption u/s.54F

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The assessee had purchased two adjacent flats which were interconnected and used as one residential house. On the assesee’s claim for exemption u/s.54F of the Income-tax Act, 1961 the Tribunal passed the order as under:

“It has been shown to us that investment was made by the assessee himself from his bank account in respect of both the flats i.e., flat Nos. 301 and 302 at Cozy Dwell Apartments at Bandra, Mumbai. However, this needs verification by the Assessing Officer. Further the fact whether these two apartments are being used as one residential house or not is also to be verified. Accordingly, the order of the CIT(A) is set aside and the matter is restored to the file of the Assessing Officer to — (1) verify the fact whether investment in flat Nos. 301 and 302 was made by the assessee from his own funds, and (2) whether such flats are adjacent to each other having common passage and are being used as one residential house. After ascertaining these facts the Assessing Officer shall allow the exemption in respect of both the flats if it is found that both the flats are being used as one residential house and the investment was made by the assessee himself.”

The Bombay High Court upheld the decision of the Tribunal and dismissed the appeal filed by the Revenue.

Note: The Supreme Court has dismissed the SLP No. 12607 of 2009 filed by the Revenue, by order dated 7-9-2009.

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Capital gains: Exemption u/s.54F: Purchase of two adjacent flats, interconnected and used as one residential house: Assessee entitled to exemption u/s.54F.

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The assessee had purchased two adjacent flats which were interconnected and used as one residential house. On the assesee’s claim for exemption u/s.54F of the Income-tax Act, 1961 the Tribunal passed the order as under: “It has been shown to us that investment was made by the assessee himself from his bank account in respect of both the flats i.e., flat Nos. 301 and 302 at Cozy Dwell Apartments at Bandra, Mumbai. However, this needs verification by the Assessing Officer. Further the fact whether these two apartments are being used as one residential house or not is also to be verified. Accordingly, the order of the CIT(A) is set aside and the matter is restored to the file of the Assessing Officer to — (1) verify the fact whether investment in flat Nos. 301 and 302 was made by the assessee from his own funds, and (2) whether such flats are adjacent to each other having common passage and are being used as one residential house. After ascertaining these facts the Assessing Officer shall allow the exemption in respect of both the flats if it is found that both the flats are being used as one residential house and the investment was made by the assessee himself.” The Bombay High Court upheld the decision of the Tribunal and dismissed the appeal filed by the Revenue. Note: The Supreme Court has dismissed the SLP No. 12607 of 2009 filed by the Revenue, by order dated 7-9-2009.

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Salary: Perquisites: S/s. 17(2), r.w.s. 10(10CC): Assessees were employees of a foreign company, working in India: Tax arising in India on income of employees was borne by foreign employer: Amounts paid directly by employer to discharge employees’ incometax liability is exempt u/s. 10(10CC): Not a perquisite: Social security, pension and medical insurance contributions paid by employer are not taxable as perquisites: Where tax is deposited in respect of non-monetary perquisite, it is exempt u/s<

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Yoshio Kubo vs. CIT; [2013] 36 taxmann.com 1 (Delhi)

The
assessees were employees of a foreign company who were seconded to
India to serve in the Indian subsidiary. The foreign employers bore the
tax arising in India on the income of the employees. The foreign
employer also made contributions towards social security, pension and
medical insurance in compliance with the legal requirements in the
country of its incorporation. The revenue sought to bring to tax such
contributions as well as the tax paid by the employer as perquisite u/s.
17(2), in the hands of the employees. The revenue also contended that
the tax borne by the employer was a monetary perquisite and further tax
should be added to the salary by a multiple stage grossing up process.
The revenue also included the tax refunds in the income of the assessee
employees, as the tax had been borne by the employer.

In appeals
before the High Court the assessee contended that such perquisites were
exempt u/s. 10(10CC). The Delhi High Court held as under:

”1. Whether income tax paid by employer on behalf of assessee was exempted non-monetary perquisite:

1.1
A plain reading of section 10(10CC) reveals that if the perquisite that
is – ‘not provided for by way of monetary payment’ – u/s. 17 (2), the
tax paid on such income would be excluded from the calculation of income
altogether; it would not be deemed a perquisite.

1.2 Section
17(2) has not undergone any substantial change by the amendment of 2002.
The only change is in the introduction of section 10(10CC) which states
that tax actually paid by the employer to discharge an employee’s
obligation – ‘not amounting to a monetary benefit’ would not be included
as the employees’ income. If seen from the context of section 17(2),
and the previous history to that provision, as well as the pre-existing
provision of section 10(5B) and the interpretation placed on section
17(2), read with other provisions which disallow payments made on behalf
of the employee, by the employer, so long as the benefit is not
expressed in monetary terms in the hands of the employee, in the sense
that it is not funded as part of the salary, but paid in discharge of
the obligation, of any sort, either contractual (i.e., rent, services,
etc . availed of by the employee) or legal (tax) directly by the
employer, it should not be treated as a monetary benefit. The reason for
this is that section 10(10CC) is neutral about the kind of benefit
availed by the employee.

1.3 Parliament was aware of the
pre-existing law, and therefore, stepped in to clarify that only a
monetary benefit directly in the hands of the employee as a payment by
the employer would be excluded from section 10(10CC). This may be in the
form of any benefit to pay rent, or discharge any manner of obligation,
tax not excluded. This intention is manifest from the expression –
‘tax’ on such income actually paid. To construe this newly introduced
provision in any other manner would be to defeat the Parliamentary
intent. Section 40(a)(v) fortifies the interpretation of this court in
providing that while calculating income of the employer, the tax paid by
the employer on non-monetary perquisites is not deductible. This
provision too was introduced in 2002. The logic of excluding, as a
non-monetary perquisite, amounts paid to discharge obligations of the
employee, from the meaning of income, by virtue of section 10(10CC) is
that now, with the introduction of section 40(c)(v), such amounts are
not deductible in the employer’s hands.

1.4 In the light of the
above discussion, it is held that amounts paid directly by the employer
to discharge its employees’ income tax liability do not fall within the
excluded category of monetary benefits payable to the employee; they
fall within the included category, u/s. 10(10CC) as amounts paid
directly as taxes. Correspondingly, they cannot now be claimed as
deductions by virtue of section 40(c)(v ). The revenue’s appeals on this
aspect fail.

2. Whether social security, pension and medical insurance contributions by employer are perquisites:

2.1
The revenue’s contentions are insubstantial and meritless. The assessee
does not get a vested right at the time of contribution to the fund by
the employer. The amount standing to the credit of the pension fund
account, social security or medical or health insurance would continue
to remain invested till the assessee becomes entitled to receive it. In
the case of medical benefit, the revenue could not support its
contentions by citing any provision in any policy or scheme which was
the subject matter of these appeals, where the vesting right to receive
the amount under the scheme or plan occurred. One cannot be said to
allow a perquisite to an employee if the employee has no right to the
same. It cannot apply to contingent payments to which the employee has
no right till the contingency occurs. The employee must have a vested
right in the amount. In the case of CIT vs. Mehar Singh Sampuran Singh
Chawla [1973] 90 ITR 219 (Delhi), it was held that the contribution made
by the employer towards a fund established for the welfare of the
employees would not be deemed to be a perquisite in the hands of the
employees concerned as they do not acquire a vested right in the sum
contributed by the employer.

2.2 When the amount does not result
in a direct present benefit to the employee, who does not enjoy it, but
assures him a future benefit, in the event of contingency, the payment
made by the employer, does not vest in the employee.

2.3 In view
of the above discussion, it is held that the revenue’s appeals have to
fail; amounts paid by employers to pension, or social security funds or
for medical benefits, are not perquisites within the meaning of the
expression, u/s. 17(2)(v), and therefore, the amounts paid by the
employer in that regard are not taxable in the hands of the
employee-assessee.

3. Regarding grossing up:

3.1
It has been discussed and concluded that what is not exempt u/s.
10(10CC), is perquisite in the shape of monetary payment to the
employee. If it is a payment to a third party like payment of taxes to
the government, it would be exempt u/s. 10 (10CC).

3.2 The
Tribunal in the present cases, held that tax paid by the employer on
behalf of the employee is a non-monetary perquisite. In other words,
taxes paid by the employer can be added only once in the salary of the
employee. Thereafter, tax on such perquisites is not to be added again.

3.3
Whenever tax is deposited in respect of a non-monetary perquisite, the
provision of section 10(10CC) applies, thus excluding multiple stage
grossing up. The purpose and intent of introducing the amendment to
section 10(10CC) was to exclude the element of income, which would have
arisen otherwise, as a perquisite, and as part of salary. Once that
stood excluded, and option was given to the employer u/s. 192(1A) to
honour the agreement with the employee, Parliament could not have
intended its inclusion in any other form, even for the purpose of
deduction at source. Doing so would defeat the intent behind section
10(10CC). This court, therefore, answers the question in favour of the
assessee and against the revenue.

4. Regarding assessability of TDS refunds

4.1 In this case, it is clear that the amount was not paid to the employee or due to him, from the employer, according to the terms of the contract governing the relationship. It was paid to the Government, over and above the tax due on the salary. It was not for benefit of the assessee. It never, therefore, bore the characteristic of salary or perquisite. Till assessment was made, the amount could not be refunded to the assessee.

4.2 The revenue’s position overlooks that all receipts are not taxable receipts. Before a receipt is brought to tax, the nature and character of the receipt in the hands of the recipient has to be considered. Every receipt or monetary advantage or benefit in the hands of its recipient is not taxable unless it is established to be due to him. If the amount is not due, the recipient, in this case, the employee is obliged to pay back the sum to the person, to whom it belongs. A perquisite or such amount, to be taxed, should be received under a legal or eq-uitable claim, even contingent.

4.3 The receipt of money or property, which one is obliged to return or repay to the rightful owner, as in the case of a loan or credit, cannot be taken as a benefit or a perquisite. The amounts paid in excess by the employer, and refunded to the employee never belonged to the latter; he cannot be therefore taxed. The question of law is therefore, answered against the revenue, and in favour of the assessees.”

Provisional attachment: Section 281B: A. Y. 2011-12: Provisional attachment should be commensurate with claim of revenue:

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KDH Properties P. Ltd. vs. ACIT; 356 ITR 1 (Mad):

For the A. Y. 2011-12, the assessee company had filed return of income computing loss of Rs. 2,67,00,000. Subsequently, pursuant to survey u/s. 133A of the Income-tax Act, 1961, the Assessing Officer impounded books of account and documents. The Assessing Officer also passed provisional attachments of properties and also the debts and security deposits due from third parties.

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

“i) The provisional attachment made in terms of section 281B of the Income-tax Act, 1961, should be commensurate with the claim of Department, more particularly to safeguard the interests of the Revenue. The Assessing Officer should form an opinion as to what extent of property is required to protect the interest of the Revenue. It cannot be an arbitrary claim based on no materials. It should stand the test of reasonableness and avoid arbitrariness.

ii) If the petitioner were able to establish the valuation of the property as stated by cogent and proper materials acceptable to the Department subject to final assessment, the property could continue to be under provisional attachment as per section 281B and all other debts and security deposits due from third parties could be released from the provisional attachment.”

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Housing Project: Income from: Deduction u/s.80-IB(10): Interest on delayed payment by purchasers due from contractors and suppliers: Part of income derived from development of housing project: Entitled to deduction u/s. 80-IB(10):

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CIT vs. Pratham Developers: 355 ITR 507 (Guj):

The assessee was in the business of developing and building housing projects and accordingly was entitled to deduction u/s. 80-IB (10) of the Income-tax Act, 1961. The Assessing Officer made an addition of Rs. 11,05,556 ( Rs. 4.36 lakh – interest received from purchasers on delayed payments and Rs. 8.70 lakh – balances written off in case of contractors and suppliers) by way of disallowance out of the claim for deduction u/s. 80-IB(10). The Assessing Officer held that these sums did not represent the assessee’s income from the development of housing project. The CIT(A) and the Tribunal allowed the assessee’s claim and deleted the addition.

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

“i) Interest received on delayed payments by the purchasers was part of income derived from the business of the assessee. It was entitled to special deduction u/s. 80-IB (10) in respect of the amount.

ii) During the course of the business in developing the housing project, the assessee had made payments to suppliers towards various purchases made. On such payments, the assessee would occasionally deduct sum amounts and pay the bill. The difference between the bill amount and the payment actually made would be the amount generated during the course of business. The assessee was entitled to special deduction u/s. 80-IB(10) in respect of such sum.”

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Educational institution: Exemption u/s. 10(23C)(vi); Rule 2CA of I. T. Rules, 1962: Assessee society running a degree college made application for approval u/s. 10(23C) (vi) for A. Y. 2009-10 onwards: Commissioner rejected application on grounds that (i) approval u/s. 10(23C)(vi) was available only to an educational institution existing solely for educational purposes while memorandum of assessee stipulated other objects as well,

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Neeraj Janhitkari Gramin Sewa Sansthan vs. CCIT; [2013] 36 taxmann.com 105 (All):

The assessee, a society, was registered under the Societies Registration Act, 1860. It was running a degree college in Mainpuri. It was also registered with the Income-tax Department. It made an application for approval for exemption u/s. 10(23C)(vi) for assessment year 2009-10 onwards. The Commissioner rejected the said application on the grounds that (i) the approval u/s. 10(23C)(vi) was available only to an educational institution existing solely for educational purposes while the memorandum of the assessee-society stipulated other objects as well, and (ii) the application for approval should have been filed by the educational institution while it had been made by the society.

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

“i) The first and foremost question which is required to be considered is whether the application for approval u/s. 10(23C)(vi) at the instance of the assessee-society was maintainable or not. The Supreme Court in the case of American Hotel & Lodging Association Educational Institute vs. CBDT [2008] 301 ITR 86/ 170 Taxman 306 had considered the effect of insertion of clause (vi) in section 10(23C) by the Finance (No. 2) Act, 1998, w.e.f. 01-04-1999 and held that the provisions of clause (vi) of section 10(23C) are analogous to provisions of section 10(22). The Punjab and Haryana High Court had the occasion to consider the effect of section 10(23C)(vi) in the case of Pinegrove International Charitable Trust vs. Union of India [2010] 327 ITR 73/ 188 Taxman 402 and while replying to a specific question whether a society registered under the Societies Registration Act, 1860 was eligible to apply for approval u/s. 10(23C)(vi) held that the application for approval u/s. 10(23C)(vi) was maintainable at the instance of a society. Similar view had been taken by the Delhi High Court in the case of Digember Jain Society for Child Welfare vs. DGIT (Exmp.) [2010] 329 ITR 459/185 Taxman 255. Therefore, the application filed by the assessee-society cannot be rejected on the ground that it is not at the instance of ‘educational institution’ as referred to u/s. 10(23C)(vi) and rule 2CA.

ii) The next question which now arises for consideration is whether the assessee’s application for approval u/s. 10(23C)(vi) can be rejected on the ground that the memorandum of association provides for various other objects apart from educational activities. In this regard, the argument of the assessee is that even though under the unamended bye-laws of the society various other aims and objects were mentioned, but according to application for approval the society is only carrying on educational activities. In the application, there is a specific assertion that the only source of income of the society is the nominal fees being charged from students and it has no other source of income. The assessee has placed strong reliance on the judgment of the Allahabad Court in the case of C.P. Vidya Niketan Inter College Shikshan Society vs. Union of India [Writ petition No. 1185 of 2011, dated 16-10-2012].

iii) Perusal of the impugned order shows that the pleading in this regard has not been taken into consideration. Further in the impugned order although there is a finding that the assesseesociety is having many objects other than educational, but there is no application of mind to the assertion made by the society that it is only pursuing the educational activity and no other. Where a society is pursuing only educational objects and no other activity, then the application by such a society for grant of approval u/s. 10(23C)(vi) cannot be rejected on the ground that its aims and objects contain several other objects apart from educational and application by such a society is perfectly maintainable.

iv) Therefore, the impugned order passed by the Commissioner was liable to be quashed. The matter required to be sent back to the Commissioner for a fresh decision in accordance with the observations made above.”

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Capital gains: Section 50C: r.w.ss. 16A and 24 of W. T. Act, 1957: Sale of immovable property for consideration of Rs. 2,06,18,227: Stamp duty value – Rs. 4,04,48,000: Value as per DVO – Rs. 2,83,19,289: Value as per Registered valuer of assessee – Rs. 2,23,41,000: AO adopted value of Rs. 2,83,19,289 as per DVO: Tribunal adopted value of Rs. 2,23,41,000 as per registered valuer without giving opportunity to DVO: Tribunal not justified in doing so:

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CIT vs. Prabhu Steel Industries Ltd.: [2013] 36 taxmann. com 393 (Bom):

The assessee admitted long-term capital gains from sale of immovable property and adopted actual sale consideration of Rs. 2,06,18,227 as basis for computation. The Assessing Officer found that as per concerned Stamp Valuation Authority, the market value of the property was Rs. 4,04,48,000. On reference, the valuation officer estimated the fair market value on the date of transfer to be Rs. 2,83,19,289. Meanwhile, the assessee submitted a report of Registered Valuer disclosing fair market value on the date of transfer to be Rs. 2,23,41,000. The Assessing Officer worked out long-term capital gain on basis of report of valuation officer and made addition. The Tribunal held that the fair market value worked out by the assessee’s registered valuer alone should have been used for computing the longterm capital gain, as it was reasonably arrived at after making allowances for various encumbrances attached to the subject property and rejected the valuation arrived at by the Valuation Officer after noting that the Valuation Officer treated stamp duty valuation as base rate, instead of actual sale instance value. Further, it held that though such report is binding on Revenue Authorities, it is not binding on the Tribunal.

The Bombay High Court allowed the appeal filed by the Revenue and held as under:

“i) It is apparent from section 16A of Wealth Tax Act that these provisions mandate that after the Assessing Officer receives report of Valuation Officer u/s. 50C, he has to act in conformity with the valuation of the capital asset worked out therein. Thus, an order of Valuation Officer determining the market value of the asset on the date of transfer u/s. 50C(2) is made appealable even for the purpose of Income-tax Act, 1961 as per scheme in section 23A of Wealthtax Act. S/s. (6) of section 23A stipulates that when the valuation of any asset is objected to in an appeal, the Commissioner (Appeals) has to extend an opportunity of hearing to the Valuation Officer, who has made order u/s. 16A. It therefore, follows that when in an appeal, such exercise of valuation officer is disputed, the Appellate Authority has to extend an opportunity of hearing to the Valuation Officer.

ii) Section 24 speaks of further appeals to the Appellate Tribunal. As per section 24(5) of the Wealth Tax Act, 1957; the Appellate Tribunal has to extend opportunity of hearing to the Valuation Officer, and this provision is pari materia with section 23(6) above. Therefore, when order of CIT (Appeal), is questioned in further appeal before the Tribunal, the Tribunal has to keep in mind the provisions of section 24(5) of the Wealth Tax Act, 1957 and has to extend an opportunity of hearing to the Valuation Officer.

iii) As per the statutory scheme when the report/order of Valuation Officer u/s. 50C(2) is objected to by assessee, the CIT (Appeals) or Tribunal are obliged to extend an opportunity of hearing to such Valuation Officer.

iv) The Tribunal has found faults with the report/ order of District Valuation Officer. Admittedly, the said Valuation Officer had not been heard and no opportunity was extended to him. This is contrary to obligation cast upon it by the proviso of section 24(5) of the Wealth Tax Act, 1957 as attracted by section 50C(2).

v) In this situation, a mandatory requirement of law has been violated in present matter. Hence, the impugned order of the Tribunal is hereby quashed and set aside and the proceedings are restored back to the file of the Tribunal for taking decision afresh, in accordance with law.”

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Business expenditure: Capital or revenue expenditure: Section 35DDA: A. Y. 2007-08: Payment to employees under voluntary retirement scheme: Compliance with Rule 2BA is for benefit u/s. 10(10C): No such compliance mandatory for deduction in the hands of employer u/s. 35DDA: Deduction allowable:

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CIT vs. State Bank of Mysore; 356 ITR 468 (Kar):

For the A. Y. 2007-08, the assessee, a public sector bank, had claimed deduction of Rs. 7,09,53,323.23 as deductible expenditure incurred to meet the claims of employees who had taken voluntary retirement. The Assessing Officer allowed the deduction as revenue expenditure. Exercising the powers u/s. 263 of the Income-tax Act, 1961, the Commissioner held that the expenditure was in the nature of capital expenditure and disallowed the amount on the ground, inter alia, that even applying the provisions of section 35DDA the voluntary retirement scheme was not in consonance with rule 2BA of the I. T. Rules 1962. The Tribunal held that this was a case where the scheme was covered u/s. 35DDA. The condition imposed in Rule 2BA with reference to the recipient for the purpose of section 10(10C) was not attracted to the provisions of section 35DDA. Since under the provisions u/s. 35DDA the entire amount could not be allowed as deduction, but it could be spread over a period of five years, one-fifth of the expenditure could be allowed and the balance spread over the following four assessment years.

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

“i) There was no mention of any rule in section 35DDA. On the other hand, in rule 2BA there is a specific reference to section 10(10C). The language of rule 2BA made it clear that the amount received is by the employee and for the purpose of claiming the benefit u/s. 10(10C). This has nothing to do with the employer’s claim, which is a different claim u/s. 35DDA.

ii) The Tribunal rightly took the view that rule 2BA is attracted and applicable only to a circumstance, where the benefit u/s. 10(10C) is sought for and not in a situation where the provisions of section 35DDA are called in aid.”

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Business expenditure: Disallowance u/s. 43B(b) r/w.s. 36(va): Contribution to provident fund: Due date mentioned in section 36(va) is due date mentioned in section 43B(b): Contribution made after due date specified by Provident Fund Authority but before due date for filing return: Amount deductible:

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CIT vs. Kichha Sugar Co. Ltd.: 356 ITR 351 (Uttarakhand):

The assessee employer, had deposited the employees’ contribution towards provident fund before the due date for filing of the return but after the due date specified by the Provident Fund Authority. The Assessing Officer disallowed the claim for deduction and treated the amount as income relying on the provisions of section 36(1)(va) of the Income-tax Act, 1961. The CIT(A) and the Tribunal allowed the assessee’s claim.

On appeal, the Revenue contended that in view of section 36(1)(va) r.w.s. 2(24)(x), such payment though made to the provident fund authorities, should be treated to be income of the assessee. The Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The due date as mentioned in section 36(1) (va) is the due date as mentioned in section 43B(b), i.e. payment/contribution made to the provident fund authority any time before filing the return for the year in which the liability to pay accrued along with the evidence to establish the payment thereof.

ii) The Assessing Officer proceeded on the basis that “due date” as mentioned in section 36(1) (va) is the due date fixed by the provident fund authority, whereas in the matter of culling out the meaning of the word “due date”, as mentioned in the section, the Assessing Officer was required to take note of section 43B(b) and by not taking the note of the provisions contained therein committed a gross error, which was correctly rectified by the Commissioner (Appeals) and rightly confirmed by the Tribunal.

iii) The appeal fails and the same is dismissed.”

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Industrial undertaking: Deduction u/s. 80-IA/80-IB: Computation: A.Ys. 1997-98 to 1999-00, 2003-04 and 2004-05: Assessee printing and publishing magazines: Four units: One unit doing job work of printing for publishing unit: Expenses attributable to publishing unit not to be allocated to printing unit for computation of the amount deductible u/s. 80-IA/80-IB:

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CIT vs. Delhi Press Patra Prakashan Ltd. (No. 1); 355 ITR 1 (Del):

The assessee was engaged in the business of printing and publishing magazines. It had four units. One unit was doing the job work of printing for the publishing unit. The assessee had maintained separate accounts in respect of which deduction u/s. 80-IA/80-IB was claimed. Relying on sections 80-IA(8), (9) and (10), the Assessing Officer held that profits of the printing unit are required to be recomputed by allocating to the printing unit the expenses relating to the cost of paper and other expenses of the publishing unit inasmuch as section 80-IA(7) requires that the profits from the eligible business must be computed as if the eligible business was the only source of income for the assessee. Accordingly, he recomputed the profits of the printing unit and the amount deductible u/s. 80-IA/80-IB. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) There was no material to support the view that the job work charges charged by the printing units from the publishing unit were not at market rates. In the absence of any defect or manipulation found by the Assessing Officer in the books maintained for the printing unit and in the absence of any material to indicate that the amounts charged by the printing unit from the publishing unit was not at comparable market rates, it would not be open for the Revenue to disregard the profits of the printing unit as disclosed by the assessee only on the basis that the profits were significantly higher than the profits earned by the assessee from other undertakings.

ii) The printing unit carried on job work of printing only and the expenses attributable to the publishing unit which relate to the publishing business could not be allocated to the printing unit. Only those expenses which related to the printing work carried on by the assessee in the printing unit were liable to be deducted from the job charges to arrive at the profits eligible for deduction u/s. 80-IA/80-IB, as the case may be.”

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Income: Accrual: Retention money: Sections 4 and 5: A. Y. 2003-04: Amount retained to ensure satisfactory performance of contract does not accrue: Not income of that year:

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DIT vs. Ballast Nedam International; 355 ITR 300 (Guj):

The assessee executed contracts. In terms of the contracts, the amounts at the rate of 10% on the onshore activities, and at the rate of 15% on the construction and erection activities, were withheld by the principal towards retention money. For the A. Y. 2003-04, the assessee claimed that the retention money of Rs. 14.31 crore did not accrue and accordingly cannot be assessed as income. However, the Assessing Officer held that the amount is the accrued income and made addition. The Commissioner and the Tribunal allowed the assessee’s claim.

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

“i) Unless and until a debt is created in favour of the assessee, which is due by somebody, it cannot be said that the assessee has acquired a right to receive the income or that the income has accrued to him.
ii) The amount retained had not accrued to the assessee in the accounting year relevant to the A.Y. 2003-04.”

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Depreciation: Actual cost: Subsidy: Section 43(1), Expln. 10: A.Ys. 2001-02 and 2002-03: Assessee a Government Company took over the telecommunication business from Government Department: Assets transferred at book value: Consideration in form of shares, debts and reserves: Reserve not a subsidy, grant or reimbursement for meeting cost of assets transferred: Reserves not to be reduced from fixed assets to arrive at actual cost: Reopening of the assessment for reducing the actual cost by reserve<

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BSNL vs. Dy. CIT; 355 ITR 188 (Del):

The assessee company was incorporated to provide the telecommunication services which were being provided earlier by the Department of Telecommunications of the Government of India. The assets were transferred at book value. Consideration was paid in the form of shares, debts and reserves. The Assessing Officer found that the consideration included reserves. He held that the cost of assets was being met by the reserves and therefore held that the reserve is required to be reduced from the cost of the assets in terms of Explanation 10 to section 43(1). He therefore reopened the assessments for the A.Ys. 2001-02 and 2002-03 and recomputed the depreciation by reducing the reserve from the cost of assets.

On a writ petition filed by the assessee, the Delhi High Court accepted the assessee’s claim and held as under:

“i) There was no basis for the Assessing Officer’s assumption that whereas value of share capital issued to the Government as part consideration for transfer of business to the assessee was limited only to the face value of the shares, reserves represented a subsidy, grant or reimbursement for meeting the cost of assets transferred.
ii) Free reserves and surpluses of a company could not be considered anything but part of shareholders’ funds. The book value of equity share consists of not only the paid up capital but also the reserves and surpluses of the company. The scheme of hiving off the business of telecommunication services by the Government of India to a corporate entity entailed incorporation of a wholly owned Government company (i.e., the assessee) and the transfer of the business as a going concern along with all its assets and liabilities to the company. Reserves was an integral part of the shareholders funds.
iii) The Government of India had transferred the assets to the assessee company at their book value and the book value of the Government of India’s holding on the assessee company as shareholder and a creditor aggregated the book value of the assets transferred. The configuration of the capital structure of the assessee had no impact on the value of the Government’s holding in the assessee as reserve(s) of a company are subsumed in the book value of its capital.
iv) There is no plausible reason to assume that the value of shareholders’ holding in a company is limited to the face value of the issued and paid up share capital and the reserves represent subsidy or a grant or reimbursement by the shareholders from which directly or indirectly the cost of the assets in the hands of the company are met.

v) We are thus of the view that the reasons as furnished by the Assessing Officer for reopening the assessments could not possibly give rise to any belief that income of the petitioner had escaped assessment and the proceedings initiated on the basis of such reasons are liable to be quashed.”

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Charitable institution: Exemption u/s. 10(23C) (iv): Sections 2(15) and 10(23C)(iv): A.Ys. 2006- 07 to 2011-12: Charitable purpose: Applicability of proviso to section 2(15): Assessee’s activities fall in section 2(15) as existed prior to 01-04-2009 under the category of advancement of any other object of general public utility: Activity of assessee in conducting coaching classes is integral to its activity of conducting course in accountancy: Cannot be equated with private coaching classes:

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Assessee entitled to exemption u/s. 10(23C)(iv): ICAI Vs. DGIT; 260 CTR 1 (Del):

The petitioner Institute was constituted under the Institute of Chartered Accountants Act, 1949, with the object to regulate the profession of Chartered Accountants in India and to ensure that the standards of professional knowledge and skill are met and maintained. Up to the

A.Y. 2005-06, the petitioner was granted approval for exemption u/s. 10(23C)(iv). Subsequent applications for approval were rejected on the ground that the Petitioner was holding coaching classes for preparing students for the examinations conducted by the Petitioner and was charging fees for the same.
The Delhi High Court allowed the writ petition filed by the petitioner against the said denial and held as under:

“i) Assessee’s activities fall within the definition of ‘charitable purpose’ in section 2(15) as it existed prior to 01-04-2009, under the category of ‘advancement of any object of general public utility’.
ii) The activity of the assessee in conducting coaching classes is integral to its activity of conducting the course in accountancy and the same cannot be equated with private coaching classes being conducted by organisations on commercial basis for preparing students to take entrance or other examinations in various professional courses.
iii) The reasoning of the DGIT that conducting interviews for a fee for the purposes of placement of its students by the assessee amounts to carrying on of a business is not sustainable. Campus interview is only a small incidental activity carried on by the assessee Institute like Universities for the placement of their students in gainful employment. This too is an activity ancillary to the educational programme being conducted by the assessee and cannot be considered as a business.
iv) The reasoning of the DGIT that since the assessee institute charges a uniform fee from all students it cannot be said to be carrying on a charitable activity is also erroneous. It is well settled that eleemosynary is not an essential element of ‘charitable purpose’ as defined under the Act. If the object or purpose of an institution is charitable, the fact that it collects certain charges does not alter the character of the institution.
v) Expression “trade”, “commerce” and “business” as occurring in the first proviso to section 2(15) must be read in the context of the intent and purport of section 2(15) and cannot be interpreted to mean any activity which is carried on in an organised manner. Purport of the first proviso is not to exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee. Thus, where the dominant object of an organisation is of charitable nature, any incidental activity for furtherance of the object would not fall within the expression “business”, “trade” or “commerce”.
vi) Impugned orders passed by the DGIT refusing to grant exemption u/s. 10(23C)(iv) are set aside and he is directed to recognise the assessee as eligible for exemption u/s. 10(23C)(iv) as an institution established for charitable purposes.”

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Business expenditure: Payment to related person: Disallowance u/s. 40A(2)(b): A.Y. 1995-96: Payment to subsidiary company: Section 40A(2)(b) not applicable:

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CIT vs. Raman Boards Ltd.: 355 ITR 305 (Kar):

The assessee, a manufacturer of insulation paper boards, entered into an agreement with its subsidiary company for manufacture of footwear soles. Under the agreement, the assessee was to pay to the subsidiary management fees of Rs. 4 lakh per month. In the A. Y. 1995-96, the assessee claimed deduction of Rs. 48 lakh so paid to the subsidiary. The Assessing Officer allowed 50% of the claim and disallowed Rs. 24 lakh u/s. 40A(2)(b). The Tribunal held that the genuineness of the agreement and the services rendered by the subsidiary company were not doubted and there being no finding that the payment made by the assessee was excessive u/s. 40A(2)(b) the Tribunal deleted the disallowance.

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

“i) To attract the provisions of section 40A(2), the assessee has to incur an expenditure by making payment to the person referred to in clause (b). The assessee was a company. The person to whom it had to make the payment in order to attract the provision was any director of the company or any relative of director.

ii) Admittedly, the payment was made to the subsidiary company and not to any director or any relative of director. Therefore, the requirement of section 40A(2)(b) was not fulfilled. The Tribunal was justified in directing the deletion of the disallowance.”

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Business expenditure: Disallowance u/s. 14A: A. Y. 2005-06 and 2006-07: Investment in subsidiaries: In respect of part of investment dividends were taxable: In respect of balance, assessee had sufficient interest free funds: No disallowance could be made u/s. 14A:

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CIT vs. Suzlon Energy Ltd: 354 ITR 630 (Guj):

The assessee had made investments in subsidiaries. The Assessing Officer made disallowance of interest expenditure and administrative expenditure u/s. 14A in respect of such investment. The Commissioner (Appeals) deleted the disallowance. The Tribunal found that in respect of part of investment, dividends were taxable and in respect of the balance the assessee had sufficient interest free funds of its own. The Tribunal confirmed the decision of the Commissioner (Appeal).

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

“The Tribunal was right in law and on facts in deleting disallowance u/s. 14A in respect of interest expenses incurred for investment in subsidiaries and administrative expenses such as staff salary of corporate office, audit fees, building rent and communication expenses.”

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Business expenditure: Disallowance u/s. 40(a) (ia) : Deduction of tax at a lesser rate due to difference of opinion: Disallowance u/s. 40(a)(ia) not justified:

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CIT vs. S. K. Tekriwal; 260 CTR 73 (Cal):

The assessee deducted tax @ 1% u/s. 194C(2) from the payments made to sub-contractors. The Assessing Officer held that the payments are in the nature of machinery hire charges falling under the head ‘Rent’ and the provisions of section 194-I are applicable as per which tax was deductible @ 10%. The assessing Officer, therefore, disallowed the payment proportionately by invoking the provisions of section 40(a)(ia). The Tribunal deleted the disallowance holding that no disallowance can be made by invoking the provisions of section 40(a)(ia), if there is any shortfall in deduction of tax at source due to any difference of opinion as to the taxability of any item or the nature of payment falling under various TDS provisions.

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

“We find no substantial question of law involved in this case and therefore, we refuse to admit the appeal. Accordingly, the appeal is dismissed.”

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Block assessment: Limitation: Special audit: Sections 142(2A) and 158BC: Direction for special audit without giving opportunity to assessee: Direction given to extend period of limitation: Assessment barred by limitation:

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CIT vs. Subboji Rao C. H.; 355 ITR 320 (Kar):

Pursuant to a search, block assessment proceedings were initiated by issuing a notice u/s. 158BC of the Income-tax Act, 1961 on 15-05-1998. The assessee computed the undisclosed income at Rs. 24,18,360 and the Assessing Officer computed the undisclosed income at Rs. 70,00,246. The Commissioner (Appeals) reduced the addition. He rejected the contention of the assessee that the assessment was barred by limitation since the direction for special audit u/s. 142(2A) was not valid. The Tribunal held that there was no complexity in the accounts requiring an audit u/s. 142(2A). It further held that invoking the provisions u/s. 142(2A) was bad in law and the assessment was barred by limitation.

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

“The assessee was not heard before the order passed u/s. 142(2A). Such a procedure was resorted to extend the period of limitation. Therefore, the assessment order was void as being barred by limitation.”

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Assessment giving effect to the order of revision: Scope: Sections 143(3) and 263: A. Y. 2006-07: Assessee carrying on two businesses; i) Mentha business and ii) Cattle feed and green vegetable business: Separate accounts maintained: Assessment set aside u/s. 263 by finding errors in cattle feed and green vegetable business: Pursuant assessment is restricted to Cattle feed and green vegetable business: Queries concerning mentha business are beyond the scope and power:

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Smt. Shobha Govil vs. Add. CIT: 354 ITR 668 (All):

The assessee was carrying on two businesses; i) Mentha business and ii) Cattle feed and green vegetable business. Separate accounts were maintained for the two businesses. The accounts of mentha business were audited. For the A. Y. 2006-07, the assessment was completed u/s. 143(3). The Commissioner found mistakes as regards the cattle feed and green vegetable business and accordingly, exercising the powers u/s. 263 set aside the assessment order and restored the matter back to the Assessing Officer. The Commissioner had not found any mistake as regards the mentha business. After remand, the Assessing Officer served a questionnaire making inquiries with regard both the businesses. The assessee resisted the questionnaire on the ground that the remand order passed by the Commissioner u/s. 263 was confined to the determination of income of the cattle feed and green vegetable business and the income from mentha business has become final as it has not been interfered with u/s. 263 of the Act. The Assessing Officer rejected the contention of the assessee.

The Allahabad High Court allowed the writ petition filed by the assessee challenging the said stand of the Assessing Officer and held as under:

“i) The entire discussion in the order u/s. 263 was confined to the question of determination of income and expenditure of the cattle feed and green vegetable business. The discussion, paragraph after paragraph, was with regard to the cattle feed and green vegetable business, viz. its sales, sale bills, absence of addresses of the purchasers of bhusa, truck expenses and freight outward expenses, salary of the staff, all related to the cattle feed and green vegetable business.

ii) There was nothing in the order of the Commissioner suggesting that the entire assessment order was being set aside. The Assessing Officer was not justified in coming to the conclusion that he was also required to pass a fresh assessment order for the mentha business.

iii) To this extent, the order cannot be allowed to stand and was liable to be set aside.”

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Settlement of cases: Chapter XIXA: A. Ys. 2001- 02 to 2006-07: Order passed by Settlement Commission is final: No Income Tax Authority can initiate proceedings in respect of period and income covered by such order: Settlement Commission cannot delegate its power

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CIT vs. Smt. Diksha Singh; 350 ITR 157 (All)

The Settlement Commission passed an order u/s. 245D(4), whereby the undisclosed income of the assessee was settled at Rs. 43 lakh for the assessment years under consideration. While passing the order, the Settlement Commission observed in paragraph 7 as follows:

“The Commissioner of Income-tax/Assessing Officer may take such action as appropriate in respect of the matter not placed before the Commission by the applicant, as per the provisions of section 245F(4) of the Income Tax Act, 1961”

The Assessing Officer issued notice and finally estimated the income at Rs. 75,84,900/- in addition to the agricultural income of Rs. 1,75,000 and made the additions accordingly. The CIT(A) and the Tribunal deleted the addition.

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

“i) A plain reading of section 245D r.w.s. 245F makes it clear that once a matter falls within the domain of the Settlement Commission, no authority of the Income-tax Department will have jurisdiction to asses tax for the same financial year and the finding of the Settlement Commission shall be conclusive and final u/s. 245-I.

ii) A mere observation of the Settlement Commission will not empower the assessing or appellate authority to reassess on any ground, whatsoever, for the same financial year with regard to which the Settlement Commission had exercised jurisdiction and given a finding.

iii) The Legislature in its wisdom had conferred power on the Settlement Commission to reopen the proceedings in certain circumstances and to deal with the situation in the event of commission of fraud. Once power has been conferred on the Settlement Commission itself to deal with the contingency, such power cannot be delegated directly or indirectly to any authority of the Income-tax Department. The discretionary administrative power entrusted by the statute to a particular authority cannot be further delegated except as otherwise provided in the statute. In other words, when the Act prescribes a particular body or officer to exercise a power, it must be exercised by that body or officer and none else unless the Act by express words or necessary implication permits delegation, in which event, it may also be exercised by the delegate if delegation is made in accordance with the terms of the Act but not otherwise.

iv) The Settlement Commission cannot make an observation delegating its power to the assessing authority to reopen the case in certain circumstances for the same financial year, when it had been conferred wide power to deal with the situation under the statutory provisions.

v) The Tribunal has rightly decided the appeal on the sound principles of law. The appeal being devoid of merit is hereby dismissed.”

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Search and seizure: Authorisation u/s. 132(1) of I. T. Act, 1961: Validity: Reason to believe: Affidavit of Dy DIT stating that he got information that there was a “likelihood” of the documents belonging to the DS Group being found at the residence of the assessee: Would amount only to surmise or conjecture and not to solid information: Warrant of authorisation not valid and is liable to be quashed

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Madhu Gupta vs. DIT(Inv).; 350 ITR 598 (Del): 256 CTR 21 (Del) The assessee challenged the validity of the search action u/s. 132 of the Income Tax Act, 1961 by filing a writ petition.

The Delhi High Court allowed the petition and held as under:

“i) The warrant of authorisation can only be issued by competent person in consonance of information in his possession and after he has formed a reason to believe that the conditions stipulated in cls. (a), (b) and (c) of section 132(1) existed. The information must be credible information and there must be a nexus between the information and the belief. Furthermore, the information must not be in the nature of some surmise or conjecture, but it must have some tangible backing. Until and unless information is of this quality, it would be difficult to formulate a belief because the belief itself is not just an ipse dixit, but is based on reason and that is why the expression used is “reason to believe” and not simply “believes”.

ii) In the present case, the so-called information is undisclosed and what exactly that information was, is also not known. At one place in the affidavit of Dy. Director of IT, it has been mentioned that he got information that there was a “likelihood” of the documents belonging to the DS Group being found at the residence of the petitioner. That by itself would amount only to a surmise and conjecture and not to solid information and since the search on the premises of the petitioner was founded on this so-called information, the search would have to be held to be arbitrary. It may also be pointed out that when the search was conducted on 21-1-2011, no documents belonging to the DS Group were, in fact, found at the premises of the petitioner.

iii) With regard to the argument raised by the counsel for the Revenue that there was no need for the competent authority to have any reason to believe and a mere reason to suspect would be sufficient, it may be pointed out that the answer is provided by the fact that the warrant of authorisation was not in the name of DS Group but was in the name of the petitioner. In other words, the warrant of authorisation u/s. 132(1) had been issued in the name of the petitioner and, therefore, the information and the reason to believe were to be formed in connection with the petitioner and not the DS Group.

iv) None of the clauses (a), (b) or (c) mentioned in section 132(1) stood satisfied. Therefore, the warrant of authorisation was without any authority of law. Therefore, the warrant of authorisation would have to be quashed.

v) Once that is the position, the consequence would be that all proceedings pursuant to the search conducted on 21/01/2011 at the premises of the petitioner would be illegal and, therefore, the prohibitory orders would also be liable to be quashed. It is ordered accordingly. The jewellery/other articles/ documents are to be unconditionally released to the petitioner.”

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Provisional attachment u/s. 281B: A. Y. 2008-09: Provisional attachment remains in operation only till the passing of the assessment order

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Motorola Solutions India (P) Ltd. vs. CIT; 254 CTR 569 (P&H)

In the course of the assessment proceedings for the A. Y. 2008-09, the Assessing Officer passed the provisional attachment order u/s. 281B and issued letters/ notices on 2-1-2012 to the Standard Chartered Bank and sundry debtors not to make payment to the assessee petitioner. The assessee challenged the validity of the order by filing a writ petition. In the mean while, on 8-11-2012, assessment order was passed raising a demand of Rs. 2,10,57,87,648/-. The Petitioner contended that the provisional attachment order u/s. 281B of the Act ceases to operate after passing of the assessment order on 8-11-2012. The contention of the Department was that the provisional attachment order will be in operation for a period of six months.

The Punjab and Haryana High Court accepted the contention of the Petitioner assessee and held as under:

“i) According to section 281B, during the pendency of any assessment proceeding or proceedings in pursuance to reassessment that in order to safeguard the interests of the Revenue, after recording the reasons for the same in writing and seeking the approval from the concerned authority, an order for provisional attachment can be passed. Circular No. 179 dated 30-9-1975 clearly envisages that where during the pendency of any proceeding for assessment or reassessment of any income, the raising of demand is likely to take time due to investigations and there is apprehension that the assessee may thwart the collection of that demand to be made. This supports the interpretation that it is only till actual demand is created by passing an assessment order that the provisional attachment order will remain in operation.

ii) There are sufficient provisions in the Act, like section 220(1), proviso to safeguard the interest of the Revenue in case the Assessing Officer has apprehension that the assessee by adopting extraneous method may thwart the recovery of the legitimate tax dues of the State. In view of the above, the interpretation put by the Revenue that even after passing of the assessment order, provisional attachment order shall still remain in force for six months, does not merit acceptance and is, thus, rejected.”

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Business expenditure: Disallowance u/s. 40(a) (ia): A. Y. 2008-09: Amendment of section 40(a)(ia) by Finance Act, 2010 is retrospective and is applicable for the A. Y. 2008-09 also:

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CIT vs. Naresh Kumar; 262 CTR 389 (Del):

In respect of the A. Y. 2008-09, the Tribunal allowed the assessee’s claim that no disallowance u/s. 40(a) (ia) should be made in view of the amendment of section 40(a)(ia) by the Finance Act, 2010.

In appeal, the Revenue contended that the amendment is w.e.f 01-04-2010 and is not
retrospective, and accordingly, the amendment is not applicable for the A. Y. 2008-09. The Delhi High Court upheld the decision of the Tribunal and held as under:

“The Tribunal was justified in holding that the amendment made to section 40(a)(ia) by the Finance Act, 2010 should be given retrospective effect and applicable to A. Y. 2008-09 in question”

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Business expenditure: Bonus: Section 36(1) (ii): A. Ys. 2005-06 and 2006-07: Bonus paid to director as per Board resolution: Directors rendering valuable services to company: Bonus not related to shareholding: Bonus deductible:

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CIT vs. Career Launcher India Ltd.; 358 ITR 179(Del):

For the A. Ys. 2005-06 and 2006-07, the Assessing Officer disallowed the claim for deduction of the bonus paid to the directors on the ground that it would have been payable to the directors as dividend had it not been paid as bonus. The Tribunal allowed the assessee’s claim and deleted the addition. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) It was not disputed regarding bonus (a) that payment was supported by board resolutions, and (b) that none of the directors would have received a lesser amount of dividend than the bonus paid to them, having regard to their shareholding.

ii) Further, the directors were full-time employees of the company receiving salary. They were all graduates from IIM, Bangalore. Taking all these facts into consideration, the bonus was a reward for their work, in addition to the salary paid to them and was in no way related to their shareholding. It was deductible u/s. 36(1)(ii).”

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Assessment: Limitation: Section 158BC: Block Period ending on 14-09-2002: Exclusion of period during which assessment stayed by Court: Limitation resumes on date of vacation of stay and not from date of receipt of order by Department: Assessment barred by limitation:

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CIT vs. Drs. X-Ray and Pathology Institute Pvt. Ltd.;358 ITR 27(All)

On 14-09-2002, search was conducted at the assessee’s premises and a notice u/s. 158BC was issued on 29-04-2003. The assessee filed the return on 16-06-2003. The assessee filed writ petition and challenged the validity of search. By order dated 12-02-2004, the High Court stayed the assessment proceedings. The stay was vacated on 26-08-2009 and the copy of the order was received by the Assessing Officer on 09-11-2009. The Assessing Officer passed the assessment order on 22-06-2010. The Tribunal held that the limitation resumes on the date of vacation of the stay and accordingly the assessment was barred by limitation.

In appeal, the Revenue contended that the limitation resumes from the date of receipt of the order by the Department i.e. 09-11-2009 and accordingly the assessment was within the limitation period. The Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) The provisions of the Act for filing of the appeal from the date of service of the order would not be attracted to calculate the period of limitation to complete the assessment. This was not a case of a particular act to be performed, but the arrest of the limitation by an interim order passed by the High Court.

ii) As soon as the order was vacated, the limitation would restart and exhaust itself on the period of limitation provided under the Act. The assessment was clearly barred by limitation.”

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AAR: Section 245R : Application for ruling: No requirement of recording reasons at stage of admission: Commissioner or his representative need not be heard at that stage: Hearing Commissioner or his representative before pronouncing advance ruling only if Authority considers necessary:

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DIT vs. AAR; 352 ITR 185 (AP):

The second Respondent sought an advance Ruling on the question whether the capital gains arising from the sale of shares of a French incorporated entity by the applicant, a French incorporated entity, was liable to tax in France or in India. Notice was given by letter to the CBDT. The Department objected that since proceedings had already been taken in terms of section 195 to 201 in the applicant’s case, the application was hit by the bar in proviso to section 245R(2) of the Income-tax Act, 1961. However, before the objections were received by the Authority for Advance Ruling, the Authority passed an order admitting the application.

In a writ petition filed by the Department, the following question was considered by the Andhra Pradesh High Court:

“Whether while allowing the application filed u/s. 245Q(1) it was essential for the Authority for Advance Rulings to consider the issue of admissibility as a preliminary issue, with regard to the threshold bar u/s. 245R(2), by recording reasons in writing and whether the Department was entitled to a hearing before allowing the application for pronouncing its advance ruling?”

The High Court dismissed the petition and held as under:

“i) S/s. (1) of section 245R, which contemplates forwarding of a copy of such application to the Commissioner, if necessary, calling upon him to furnish the relevant records, does not contemplate the filing of objections or response to the application so made. S/s (2) authorises the Authority, after examining the application and the records called for, by order, either allow or reject the application, but a rider is added by way of proviso that the Authority shall not allow application, inter alia, where the question raised in the application is already pending before any income-tax authority or Appellate Tribunal. The second proviso provides that no application shall be rejected unless an opportunity has been given to the applicant of being heard. If the application is rejected, reasons for such rejection shall be given as per the third proviso to section 245R.

ii) Nowhere does section 245R state that the Commissioner from whom records were called for is to be called upon to make his objections to the admission of application and record reasons when it allowed the application for an advance ruling.

iii) While exercising the jurisdiction under Article 226 of the Constitution, if the High Court is of the opinion that there is no other convenient or efficacious remedy open to the petitioner, it will proceed to investigate the case on its merits and if the Court finds that there is an infringement of the petitioner’s legal rights, it will grant relief, otherwise relief should be rejected.

iv) The entire exercise to be undertaken by the Authority for allowing the application is only to verify the records called for whether an advance ruling on the question specified in the application was required to be made or not. There is a clear dichotomy between the threshold stage of allowing the application for advance ruling and pronouncing of advance ruling. If the Authority admits the application for pronouncing an advance ruling recording of reasons at that stage is not at all required nor is hearing contemplated to the Commissioner or his authorised representative. Only on such admission before pronouncing its advance ruling hearing of the Commissioner or his authorised representative is provided if the Authority considers necessary to hear but not at the threshold stage of admitting the application.

v) The Director of Income-tax and the Additional Commissioner failed to substantiate the infringement of legal right conferred on them under the statute while allowing the application for advance ruling. The writ petitions were devoid of merit and were accordingly dismissed.”

iii) Therefore, the sum forfeited by the assessee to the Council was allowable u/s. 37(1).”

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Reassessment: Limitation: Exclusion from limitation: S/s. 147, 148, 149 and 150: A.Ys. 1999-00 to 2002-03: Reassessment pursuant to order of appellate authority in case of third party: Condition precedent for exclusion of limitation: Assessee must be given opportunity to be heard: Order of Tribunal in case of third party holding that interest income belonged to assessee: Notice for reassessment beyond six years to assessee without giving opportunity to be heard: Notice barred by time:

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Rural Electrification Corporation Ltd. vs. CIT; 355 ITR 345 (Del):

The assessee advanced loans to a co-operative society which created a special corpus fund. The society earned interest on the special fund but did not disclose it in its return of income on the ground that the money actually belonged to the assessee and that any income earned thereon was on behalf of the assessee. The Tribunal agreed with the submissions of the society and held that the interest was not taxable in the hands of the society but ought to be taxed in the hands of the assessee. On the basis of the said observations of the Tribunal the Assessing Officer issued notices u/s. 148 of the Income-tax Act, 1961 on 23-03-2011 for reopening the assessment for the A.Ys. 1999-00 to 2002-03.

The Delhi High Court allowed the writ petition filed by the assessee, set aside the notices issued u/s. 148 and held as under:

“i) Before a notice u/s. 148 can be issued beyond the time limit prescribed u/s. 149, the ingredients of Explanation 3 to section 153 have to be satisfied. Those ingredients require that there must be a finding that income which is excluded from the total income of one person is income of another person. The second ingredient is that before such a finding is recorded, such other person should be given an opportunity of being heard.

ii) When the Tribunal held in favour of the society concluding that the interest was not taxable in its hands and that the interest ought to have been taxed in the hands of the assessee, an opportunity of hearing ought to have been given to the assessee. No opportunity of hearing was given to the assessee prior to the passing of the order by the Tribunal in the case of the society.

iii) As such, one essential ingredient of Explanation 3 was missing and, therefore, the deeming clause would not get triggered. Thus, section 150 would not apply and, therefore, the bar of limitation prescribed by section 149 was not lifted. In such a situation, the normal provisions of limitation prescribed u/s. 149 would apply.

iv) Those provisions restrict the time period for reopening to a maximum of six years from the end of the relevant assessment year. The notices u/s. 148 having been issued beyond the period of six years were time barred.”

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Cash credits : Section 68: A. Y. 2004-05: Assessee sold shares and claimed to have earned capital gains: Assessee produced purchase bills of shares, letter of transfer, sale bills, accounts with brokers, purchase and sale chart and copy of quotations from stock exchange showing rate of shares at relevant time and letters from brokers confirming sale of shares: Payment of sale price was made through bank channel and not in cash: Sale transactions of shares could not be disbelieved only for reaso<

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CIT vs. Sudeep Goenka; 29 Taxman.com 402 (All)

In the A. Y. 2004-05, the assessee had showed long term capital gains on sale of shares. The Assessing Officer found that the assessee had purchased the shares for a price of Rs. 1,37,750/- in April 2002 and had sold the shares in May and November 2003 for a price of Rs. 42,34,350/-. The Assessing Officer found that the shares were sold for a price more than 30 times of the purchase price. He therefore held that the transactions are bogus. Therefore, he treated the sale price of the shares as the income from undisclosed sources u/s. 68 of the Income Tax Act, 1961. The Commissioner (Appeals) deleted the addition as the assessee had filed purchase bills of shares, letters of transfer, sale bills, accounts of brokers, purchase and sale chart, copy of quotations of Stock Exchange showing the rate of shares at relevant times and letters from broker confirming sale. On an independent inquiry, ICICI Bank informed that payment of sale price of shares was made through bank draft. Thus, documentary evidence proved that the transactions were actual and not fictitious accommodation entries. On appeal, the Tribunal upheld the order of Commissioner (Appeals).

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

“i) The Commissioner (Appeals) after considering entire evidence of record, found that purchase and sale transactions were proved. He further found that payment of the sale price was made to the assessee through bank channel and not in cash and as such, the transactions are actual transactions and not a fictitious accommodation entries.

 ii) The sale transactions cannot be disbelieved only for the reason that the assessee could not give the identity of the purchasers.”

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Capital gain: Rate of tax: Section 112: A. Y. 2010-11: Non-residents are eligible for the benefit of 10% tax rate on long term capital gains under proviso to section 112(1): AAR should avoid giving conflicting rulings:

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Cairn UK Holdings Ltd. vs. DIT (Del); W. P. (Civil) No. 6752/2012 dated 07-10-2013:

The petitioner, a non-resident company, had transferred certain equity shares of a company CIL in the relevant year resulting in a long-term capital gain of INR532,84,251 after applying the benefit under the first proviso to section 48 of the Income-tax Act, 1961. The petitioner made an application to AAR for an advance ruling on the following question.

“Whether on the stated facts and in law, the tax payable on long term capital gains arisen to petitioner assessee on sale of equity shares of CIL will be 10% of the amount of capital gains as per proviso to section 112(1) of the Act?”

AAR accepted the plea and contention of the Revenue and held that the proviso to section 112(1) was not applicable and therefore, the petitioner cannot avail the lower rate of tax at 10% on capital gains. The reason and ratio applied was that for the proviso to section 112(1) to apply, second proviso to section 48 should be also applicable and as second proviso to section 48 was excluded and was not applicable to the petitioner, benefit of lower rate of tax at 10% was not available.

The petitioner assessee filed a writ petition before the Delhi High Court and challenged the order of the AAR. The petitioner submitted that they are covered by the proviso to section 112(1) as they are not taking benefit of indexation under the second proviso to section 48. The assets sold by them were shares listed on the Bombay Stock Exchange and National Stock Exchange. This satisfies the statutory requirement of assets to be listed securities. The proviso nowhere stipulates that if an assessee takes benefit of first proviso to section 48, the proviso to section 112(1) is not applicable. Neither does the language postulates that the assessee must be entitled to benefit of the second proviso to section 48 and only when the said proviso is applicable but not applied, that an assessee can get benefit under proviso to section 112(1) of the Act. It was further submitted that the view of the petitioner was accepted by the AAR on 01-10-2007 in Timken France SAS, In Re, reported in (2007) 294 ITR 513 (AAR), and was repeatedly followed in the subsequent decisions and even in one decision after the present impugned decision.

The Delhi High Court allowed the writ petition and held as under:“

i) It is not possible to decipher the exact legislative purpose behind the proviso to section 112(1) in a categorical and unambiguous manner. However, if one squarely focuses on the words used in the proviso and interpret them without extracting or subtracting any phrase or word, a non-resident assessee is entitled to benefit of the said provision.

ii) The proviso to section 112(1) does not state that an assessee, who avails benefits of the first proviso to section 48, is not entitled to lower rate of tax at 10%. The said benefit cannot be denied because the second proviso to section 48 is not applicable. In case the legislature wanted to deny the said benefit where the assessee had taken the benefit of the first proviso to section48, it was easy and this would have been specifically stipulated. The fact that by this interpretation, a non-resident becomes entitled to double deductions by way of computation of gains in foreign currency under the first proviso to section 48 and the benefit of lower rate of tax under the proviso to section 112(1) is no reason to interpret the proviso differently.

iii) Further, as the AAR had taken a view in Timken France SAS which was followed in several cases over several years, it ought not to have taken a opposite view and brought about uncertainty in understanding the effect of the proviso to section 112(1). There should be consistency and uniformity in interpretation of provisos as uncertainties can disable and harm governance of tax laws. The AAR should follow its earlier view, unless there are strong grounds and reasons to take a contrary view.”

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Capital gains: Exemption u/s. 54F: A. Y. 2008-09: Exemption in case of investment in residential house: For claiming deduction u/s. 54F, new residential house need not be purchased by assessee exclusively in his own name: Purchase of new house in name of wife: Exemption could not be denied

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CIT vs. Kamal Wahal; 30 Taxman.com 34 (Del)

The assessee sold his joint property which gave rise to proportionate long term capital gains. He invested the sale proceeds in a residential house in the name of his wife and claimed deduction u/s. 54F. The Assessing Officer denied the claim for deduction holding that for deduction u/s. 54F, investment in residential house should be in the assessee’s name. The Commissioner (Appeals) allowed the assessee’s claim. The Tribunal confirmed the order of the Commissioner (Appeals), holding that section 54F, being a beneficial provision enacted for encouraging investment in residential houses, should be liberally interpreted.

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

“i) In CIT vs. Ravinder Kumar Arora [2012] 342 ITR 38 /[2011] 203 Taxman 289/ 15 taxmann.com 307 (Delhi), it was held that where the entire purchase consideration was paid only by the assessee and not a single penny was contributed by any other person, preferring a purposive construction against a literal construction, more so when even applying the literal construction, there is nothing in section 54F to show that the house should be purchased in the name of the assessee only.

ii) Section 54F in terms does not require that the new residential property shall be purchased in the name of the assessee; it merely says that the assessee should have purchased/constructed ‘a residential house’.

iii) Therefore, the predominant judicial view for the purposes of section 54F is that the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name. It is moreover to be noted that the assessee in the present case has not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife.

iv) The substantial question of law is answered in favour of the assessee and against the revenue.”

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Appeal to CIT(A): S/s. 245C and 251: Appeal can be made only by assessee: Assessee cannot withdraw appeal: Order of CIT(A) allowing assessee to withdraw appeal is not valid

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M. Loganathan vs. ITO; 350 ITR 373 (Mad)

While the assessee’s appeals were pending before the CIT(A), the assessee moved the Settlement Commission for settlement of the cases. Thereafter, the assessee withdraw the appeals and the CIT(A) allowed the assessee to do so for the A. Ys. 1992-93,1993-94 and 1996-97. The Settlement Commission passed an order that by reason of the withdrawal of the appeals after the date of filing of the application, and that there was no appeal pending before the authorities, the application itself was not maintainable for the A. Ys. 1992-93,1993-94 and 1996-97. It proceeded with the settlement of the case for the A. Y. 1997-98 alone. The assessee preferred appeals before the Tribunal against the orders of the CIT(A) allowing the assessee to withdraw the appeals. The Tribunal dismissed the assessee’s appeals.

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

“i) Section 251 of the Income Tax Act, 1961, provides that the powers of the Commissioner (Appeals) extend not only to the subject matter of the appeal against the assessment, but, in a given case, it is open to him to even enhance the assessment. Thus, apart from confirming an assessment or granting relief to the assessee or cancelling the assessment, he has the power of an Assessing Officer to enhance the assessment which is under appeal before him. He has the jurisdiction to examine all matters covered by the assessment order and correct the assessment in respect of all such matters even to the prejudice of the assessee.

ii) An assessee having once filed an appeal cannot withdraw it. After filing an appeal, the tax payer could not, at his option or at his discretion, withdraw an appeal to the prejudice of the Revenue.

 iii) The Tribunal was not justified in its reasoning that the order passed by the first appellate authority allowing the withdrawal of appeal was justifiable on the facts as the Revenue had not objected to the same.

 iv) We have no hesitation in setting aside the order of the Tribunal and restoring the matter back to the file of the Commissioner of Income Tax (Appeals) for considering the assessment on the merits and pass orders thereon in accordance with law, after giving the assessee an opportunity. In the result, the appeals stand allowed.”

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Educational Institution: Exemption: Section 10(23C)(vi): A. Y. 2008-09: Rejection of approval for exemption on the ground of defect in admission procedure: Rejection not just:

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CCIT vs. Geetanjali University Trust; 352 ITR 433 (Raj): 257 CTR 239 (Raj):

During the relevant year, i.e. A. Y. 2008-09, the admission to the college run by the assessee-trust were not on the basis of the system approved by the medical council of India and Rajasthan University. The Single Judge and the Division Bench of the High Court held that the admission was illegal. A Special Leave Petition filed by the assessee was pending before the Supreme Court. The Chief Commissioner rejected the application of the assesee for approval for exemption u/s. 10(23C)(vi) of the Income-tax Act, 1961 holding as under:

“In the institution’s case, the Hon’ble High Court has held that the admissions made for the academic year 2008-09 were illegal. The purpose of education would not be served, if the education is for students who have been illegally admitted. The purpose of education as contemplated in the section would be served only if the students have been legally admitted and not otherwise. The spending of funds on education of students who have been admitted illegally will not amount to application of income for the purpose of education. In the trust’s case, neither the condition regarding existence for the purpose of education nor the application of funds for the objects, are being fulfilled.”

However, an order granting approval was passed for the A. Y. 2010-11 and onwards.

On a writ petition challenging the order of rejection, the Single Judge of the Rajasthan High Court (352 ITR 427) set aside the order of rejection for fresh disposal and observed as under:

“The sanction was to be granted within the parameters laid down u/s. 10(23C) which are relevant and not the admission procedure undertaken by the assessee.”

On appeal by the Revenue, the Division Bench of the High Court upheld the decision of the Single Judge and held as under:

“i) U/s. 10(23C)(vi) and (via), what is required for the purpose of seeking approval is that the university or other educational institution should exist “solely for educational purposes and not for purposes of profit”. It was nowhere the case or the finding of the Chief Commissioner that on account of the defect in the admission procedure, the assessee ceases to exist solely for educational purposes or it existed for the purpose of profit. Further, it was not the case of the Revenue that the students who were admitted were not imparted education in the college in which they were admitted or the admissions granted were fake or non-existent or that the income generated by admitting the students was not used for the purpose of the assessee.

ii) The emphasis on the part of the Chief Commissioner that the purpose of education would not be served if the education is for students who have been illegally admitted and the purpose of education as contemplated in the section would be served only if the studentshave been legally admitted and not otherwise, went beyond the requirements of the section.

iii) Of course, the requirement of an educational institution to provide admission strictly in accordance with the prescribed rules, regulations and statute need to be adhered to in letter and spirit, but violation could not lead to its losing the character as an entity existing solely for the purpose of education.

iv) Therefore, there is no interference with the order of the Single Judge.”

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Capital gain: A. Y. 2007-08: Family settlement: Principle of owelty: Payment to assessee to compensate inequalities in partition of assets: Amount paid is immovable property: No capital gain arises:

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CIT vs. Ashwani Chopra; 352 ITR 620 (P&H):

In the course of the assessment for the A. Y. 2007-08, the Assessing Officer found that the assessee (Group A) had received compensation from group B at the time of partition of properties of the group of HSL and that the amount had been kept in fixed deposit receipts in accordance with the orders passed by the High Court and by the Supreme Court. The Assessing Officer considered the family settlement and found that 8.56% of Rs. 24 crore of compensation was the share of the assessee and levied long term capital gains on the amount. The Commissioner (Appeals) held that the distribution of assets including the sum of Rs. 24 crore was not complete during the relevant year as the matter was subjudice and the assessee was not allowed to use the money by the order of this court, and therefore, the sum of  Rs. 24 crore transferred to the assessee and the other members of the Group A did not accrue to the income of this group including the assessee. The Tribunal upheld this decision.

The Punjab and Haryana High Court dismissed the appeal filed by the Revenue and held as under:

“i) The payment of Rs. 24 crore to the assessee was to equalize the inequalities in partition of the assets of HSL. The amount so paid was immovable property. If such amount was to be treated as income liable to tax, the inequalities would set in as the share of the recipient would diminish to the extent of tax.

ii) Since the amount paid during the course of partition was to settle the inequalities in partition, it would be deemed to be immovable property. Such amount was not an income liable to tax.

iii) Thus, the amount of owelty, i.e. compensation deposited by group B was to equalise the partition and represented immovable property and would not attract capital gains.”

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Capital gain: Section 50C: A. Y. 2005-06: Amendment by Finance (No. 2) Act, 2009, w.e.f. 01/10/2009 is prospective: Amended provision not applicable to transactions completed prior to 01/10/2009:

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CIT vs. R. Sugantha Ravindran; 352 ITR 488 (Mad):214 Taxman 543 (Mad): 32 taxman.com274 (Mad):

In the A. Y. 2005-06, the assessee had transferred a property to a third party under an agreement for sale. Physical possession was given to the buyer but the agreement was not registered. The assessee computed the capital gain without applying the provisions of section 50C. The Assessing Officer applied section 50C and adopted the guideline value given by the stamp valuation authority as the sale consideration instead of the consideration admitted by the assessee. The Commissioner (Appeals) held that section 50C can be invoked only when the property was transferred by way of registered sale deed and assessed for stamp valuation purposes. The Tribunal held that section 50C could not be invoked as the property was not transferred by way of registered sale deed.

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

“i) The insertion of the words “or assessable” in section 50C of the Income-tax Act, 1961, w.e.f. 1st October, 2009, is neither a clarification nor an explanation to the existing provision and it is only an inclusion of new class of transactions, namely, the transfer of properties without or before registration.

ii) Before the amendment, only transfer of properties where the value was adopted or assessed by the stamp valuation authority were subjected to section 50C application. However, after introduction of the words ”or assessable” such transfers where the value is assessable by the valuation authority are also brought into the ambit of section 50C. Thus such introduction of a new set of class of transfer would certainly have prospective application only. The amendments have been made applicable w.e.f. 1st October, 2009 and will apply only in relation to transactions undertaken on or after such date.

iii) Since the transfer in the assessee’s case was admittedly made prior to the amendment, section 50C, as amended w.e.f. 1st October, 2009, was not applicable.”

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Business expenditure : Section 37(1) : A. Y. 2008-09: Software development and upgradation expenditure: Is allowable revenue expenditure:

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CIT vs. N.J. India Invest (P.) Ltd.; [2013] 32 taxmann. com 367 (Guj):

In the relevant year, the assessee claimed deduction on account of software development and upgradation expenditure. The Assessing Officer held that software development and upgradation would give the assessee an enduring benefit and such expenditure should be treated as capital expenditure. Accordingly, he disallowed the claim. The Tribunal allowed the assesee’s claim. On appeal by the Revenue , the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The assessee had entered into contract with a company, which had agreed to provide certain services. These services, thus, essentially were in the nature of maintenance and support  services providing essentially backup to the assessee, who had procured software for its purpose. These services, thus, essentially did not give any fresh or new benefit in the nature of a software to be used by the assessee in the course of the business but were more in nature of technical support and maintenance of the existing software and hardware. For example, the service provider had to provide technical support to the employees of the company and to maintain the computers and the laptop, had to supply security service for controlling the data theft and providing checks on access by unauthorised persons to the data etc.

ii) In essence, these services, therefore, were in nature of maintenance, back up and support service to existing hardware and software already installed by company for the purpose of its business. The Tribunal, therefore, rightly held that the expenditure was revenue in nature.”

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Business expenditure : Section 37(1) : A. Y. 2003-04: Landlord incurred expenditure on construction as per assessee’s requirements: Compensation paid to landlord for nonoccupation of premises, in lieu of withdrawing all claims against assessee: Was in the course of business and was allowable as revenue expenditure:

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CIT vs. UTI Bank Ltd.; [2013] 32 taxmann.com 282 (Guj):

The assessee had contracted with a landlord to take premises on lease for opening its branch, but no formal agreement was entered into. The landlord started the construction of the premises as per assessee’s requirements. However, before completion of construction, assessee came to know of the proposed construction of an overbridge over the said property which would cause hindrance to conduct its business and services. The assessee, therefore, terminated the understanding with the landlord and paid compensation to the landlord for the work done, in lieu of withdrawing all claims against the assessee. In the A. Y. 2003-04, the assessee claimed such amount paid as revenue expenditure. The Assessing Officer disallowed the claim. The Tribunal deleted the disallowance as the compensation was paid in the course of business and for the purpose of business, to protect the assessee’s interest and in lieu of the claims that could have been raised by the landlord.

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

“i) The Tribunal referred to the case of J.K. Woollen vs. CIT [1969] 72 ITR 612 (SC) in which it was held, that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the IT department.

ii) No question of law arises. Tax appeal is, therefore, dismissed.”

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Assessment giving effect to order of Tribunal: Section 254, r/w. s. 154 : A. Y. 2001-02: Tribunal restored proceeding back to AO for fresh examination of nature of share transaction: AO passed an order giving effect to order of Tribunal: Subsequently, successor AO recomputed loss and passed a fresh order: Fresh order is without jurisdiction:

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Classic Share & Stock Broking Services Ltd. vs. ACIT; [2013] 32 taxmann.com 273 (Bom.):

For the A. Y. 2001-02, the assessee filed return of income claiming loss of Rs. 16.82 crore which included a loss from share transactions of Rs. 13.63 crore. An assessment order was passed u/s. 143(3) determining a total loss of Rs. 3.13 crore after disallowing the loss from the share transactions. The Tribunal restored the assessment proceeding back to Assessing Officer for fresh examination of the nature of the share transactions in view of SEBI guidelines and to decide the matter. The Assessing Officer passed an order giving effect to the order of the Tribunal and recomputed the total loss at Rs. 16.83 crore. Subsequently, the successor in office of the Assessing Officer passed another order computing the loss at Rs. 3.19 crore.

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

“i) Once the Assessing Officer had given effect to the order of the Tribunal, his successor-in- office had no jurisdiction to pass a fresh order. The impugned order of the successor-in-office in fact reflects his awareness of the earlier order which was passed by the predecessor in order to give effect to the order of the Tribunal became the successor Assessing Officer has, in his computation, commenced with a total income as computed in the order of the predecessor Assessing Officer (viz., a loss of Rs. 16.83 crore). The successor Assessing Officer has not purported to exercise the jurisdiction u/s. 154.

ii) Once effect was given to the order of the Tribunal by the passing of an order u/s. 254 that order could have been modified or set aside only by following a procedure which is known to the Act. What the Assessing Officer has done by the impugned order is to conduct a substantive review of the earlier order of the predecessor which was clearly impermissible. Since the order of the successor Assessing Officer is clearly without jurisdiction, there was no reason or justification to relegate the Petitioner to the remedy of an appeal.

iii) Therefore, the instant petition was allowed and the assessment order passed by the successor Assessing Officer was quashed and set aside.”

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Reassessment: S/s. 147 and 148: A. Y. 2007-08: Where AO has acted only under compulsion of audit party and not independently, action of reopening assessment is not valid:

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Vijay Rameshbhai Gupta vs. ACIT; 32 Taxman.com 41 (Guj):

In the course of assessment proceedings u/s. 143(3), the Assessing Officer took a view that income earned by assessee from leasing out his restaurant was taxable as business income. Subsequently, the Assessing Officer initiated reassessment proceedings on the ground that aforesaid lease income was liable to be taxed as income from other sources and, thus, business expenses were wrongly allowed against said income.

The assessee filed writ petition challenging the validity of reassessment proceedings contending that the Assessing Officer was compelled by the audit party to reopen the assessment, though on the reasons recorded, the Assessing Officer was of the belief that no income chargeable to tax had escaped assessment.

The Gujarat High Court allowed the petition and held as under:

“i) From the series of evidence, it stands clearly established that the Assessing Officer was under compulsion from the audit party to issue notice for reopening. This is so because after the audit party brought the controversial issue to the notice of the Assessing Officer, he had not agreed to the proposal for reexamination of the issue. Thereupon, he in fact, wrote a letter and gave elaborate reasons why he did not agree to make any addition on the controversial issue.

ii) In the said letter, the Assessing Officer firmly asserted that the assessee’s income from lease was to be assessed as business income and not as income from other sources. Despite his firm assertion, the audit party once again wrote to the jurisdictional Commissioner that the reply of the Assessing Officer was not acceptable.

iii) Thus, it is apparent on the face of the record that the Assessing Officer was compelled to issue notice for reopening, though he held a bona fide he had accorded in the original assessment was as per the correct legal position.

iv) By now, it is well settled that even if an issue is brought to the notice of the Assessing Officer by the audit party, it would not preclude the Assessing Officer from acting on such communication as long as the final opinion to take appropriate action is that of the Assessing Officer and not that of the audit party. It is equally well settled however that if the Assessing Officer has acted only under compulsion of the audit party and not independently, the action of reopening would be vitiated.

v) In view of above, the impugned notice seeking to reopen the assessment was to be quashed.”

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Penalty: Limitation: S/s. 271D and 275(1)(c): A. Y. 2001-02: On 27/03/2003 AO served show cause notice for penalty u/s. 271D: Matter referred to Jt. CIT on 22/03/2004: Jt. CIT passed order of penalty u/s. 271D on 28/05/2004: The order is barred by limitation u/s. 275(1)(c):

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CIT Vs. Jitendra Singh Rathore; 257 CTR 18 (Raj):

For the A. Y. 2001-02, the assessment was completed by an order u/s. 143(3), 1961 dated 25/03/2003. The Assessing Officer noticed that the assessee had accepted cash loans exceeding the limit specified u/s. 269SS to the tune of Rs. 4,00,000/- and the same being in contravention of section 269SS initiated penalty proceedings u/s. 271D of the Act and served show cause notice on the assessee on 27/03/2003. The matter was referred to the Jt. CIT on 22/03/2004, who was the competent authority to impose such penalty u/s. 271D. On 28/05/2004, the Jt. CIT passed an order of penalty u/s. 271D imposing the penalty of Rs. 4,00,000/-. The Tribunal cancelled the penalty holding that the order is barred by limitation.

In appeal by the Revenue, the following question was raised:

“Whether on the facts and in the circumstances of the case as well as in the law, the learned Tribunal was justified in deleting the penalty u/s. 271D holding that the penalty was not imposed within the prescribed period u/s. 275(1)(c) from the date of initiation by the AO ignoring the legal provision that the authority competent to impose penalty u/s. 271D was Jt. CIT and hence the period of limitation should be reckoned from the issue of first show cause by the Jt. CIT?”

The Rajasthan High Court upheld the decision of the Tribunal and held as under:

“i) Even when the authority competent to impose penalty u/s. 271D was Jt. CIT the period of limitation for the purpose of such penalty proceedings was not to be reckoned from the issue of first show cause by the Jt. CIT, but the period of limitation was to be reckoned from the date of issue of first show cause for initiation of such penalty proceedings.

ii) For the purpose of the present case, the proceedings having been initiated on 25/03/2003, the order passed by the Jt. CIT u/s. 271D on 28/03/2004 was hit by the bar of limitation.

iii) The CIT(A) and the Tribunal have, thus, not committed any error in setting aside the order of penalty. Consequently, the appeal fails and is, therefore, dismissed.”

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Penalty: S/s. 269SS and 271D: Amount received by assessee from her father-in-law for purchasing property: Transaction genuine and source disclosed: Penalty u/s. 271D not to be imposed:

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CIT vs. Smt. M. Yeshodha: 351 ITR 265 (Mad):

In the previous year relevant to A. Y. 2005-06, the assessee received a loan of Rs. 20,99,393/- in cash from her father-in-law for purchasing property. In the penalty proceedings u/s. 271D r/w. s. 269SS, the assessee claimed that the amount received in cash from father-in-law was a gift and not a loan. The Assessing Officer held that the assessee had received the amount as a loan and not as a gift, because the amount was shown as a loan in the balance sheet of the assessee, which was filed with the return of income. He therefore imposed penalty of Rs. 20,99,393/- u/s. 271D of the Act. The Tribunal held that the transaction was between the father-in-law and the daughter-in-law and the genuineness of the transaction in which the amount had been paid by the father-in-law for the purchase of property was not disputed, and the cash taken by the assessee from her father-in-law was not a loan transaction. The Tribunal, accordingly, deleted the penalty.

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

“i) The contention of the Revenue is that the amount received by the assessee from her fatherin- law has to be treated only as a loan and if it is a loan, then the assessee is liable to pay penalty u/s. 271D of the Act.

ii) Whether it is a loan or other transaction, still the other provision, namely, section 273B, comes to the rescue of the assessee, if she is able to show reasonable cause for avoiding penalty u/s. 271D. The Tribunal has rightly found that the transaction between the daughter-in-law and the father-in-law is a reasonable transaction and a genuine one owing to the urgent necessity of money to be paid to the seller. We find that this would amount to reasonable cause shown by the assessee to avoid penalty u/s. 271D of the Act.

iii) The Tribunal has rightly allowed the appeal. We do not find any error or infirmity in the order of the Tribunal to warrant interference. Accordingly, the substantial question of law is answered in favour of the assessee.”

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Exemption: Interest on tax free bonds: Section 10(15) : A. Y. 1988-89: Interest for period between application for allotment and actual allotment: Entitled to exemption: CIT vs. Bharat Heavy Electricals Ltd.; 352 ITR 88 (Del):

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For the A. Y. 1988-89, the assessee had claimed exemption of interest on tax free bonds u/s. 10(15). The Assessing Officer disallowed the claim for exemption in respect of the interest for the period from the date of application for allotment and the date of actual allotment. The Tribunal held that the assessee was entitled to exemption.

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

“i) In view of the amplitude of section 10(15)(iv), the fact that interest was paid for a brief period of about six days would not make it any less an amount of interest payable “in respect of bonds”.

ii) The assessee was entitled to exemption on the interest earned on tax free bonds between the date of their application by the assessee and the date of their allotment.”

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Double taxation relief: Section 91(1): A. Y. 1997- 98: Income earned in foreign country: Relief of taxes paid abroad: Relief not dependent upon payment of taxes being made in foreign country in previous year:

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CIT vs. Petroleum India International; 351 ITR 295 (Bom):

The assessee had paid taxes of Rs. 82 lakh in Kuwait on the income earned in Kuwait by it during the period relevant to the A. Y. 1997-98. Its claim for deduction of the said amount u/s. 91(1), was denied by the Assessing Officer on the ground that the payment of taxes in Kuwait was not made in the previous year relevant to the A. Y. 1997-98. The Tribunal allowed the assessee’s claim.

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

“i) There was no requirement that the benefit of section 91(1) would be available only when payments of taxes had been made in the previous year relevant to the assessment year under consideration.

ii) The object of section 91(1) is to give relief from taxation in India to the extent taxes have been paid abroad for the relevant previous year. This deduction/ relief is not dependent upon the payment also being made in the previous year.

iii) The payment of taxes on the income earned in Kuwait during the previous year had been examined and found to be correct. Therefore, the assessee was entitled to double taxation benefit for the taxes paid in Kuwait.”

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Depreciation(Unabsorbed): Carry forward and set off: A. Y. 2006-07: Effect of amendment of section 32(2) w.e.f. 01/04/2002: Unabsorbed depreciation from A. Y. 1997-98 to 2001-02 got carried forward to A. Y. 2002-03 and became part thereof: It is available for carry forward and set off against the profits and gains of subsequent years, without any limit:

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General Motors India (P) Ltd. vs. Dy. CIT; 257 CTR 123 (Guj):

In this case, the question for consideration before the Gujarat High Court was as to “whether the unabsorbed depreciation pertaining to A. Y. 1997-98 could be allowed to be carried forward and set off after a period of eight years or it would be governed by section 32 as amended by Finance Act 2001?”. The reason given by the Assessing Officer is that section 32(2), was amended by Finance Act No. 2 Act of 1996 w.e.f. A.Y. 1997-98 and the unabsorbed depreciation for the A. Y. 1997-98 could be carried forward up to the maximum period of 8 years from the year in which it was first computed. According to the Assessing Officer, 8 years expired in the A. Y. 2005-06 and only till then, the assessee was eligible to claim unabsorbed depreciation of A. Y. 1997-98 for being carried forward and set off. But the assessee was not entitled for unabsorbed depreciation of Rs. 43,60,22,158/- for A. Y. 1997-98, which was not eligible for being carried forward and set off against the income for the A. Y. 2006-07.

The Gujarat High Court held as under:

“i) Amendment of section 32(2) by Finance Act, 2001 is applicable from A. Y. 2002-03 and subsequent years. Therefore unabsorbed depreciation from A. Y. 1997-98 upto the A. Y. 2001-02 got carried forward to the A. Y. 2002-03 and became part thereof.

ii) It came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and was available for carry forward and set off against the profits and gains of subsequent years, without any limits whatsoever.”

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Capital or revenue receipt: A. Y. 2003-04: Business of Multiplexes and Theatres: Exemption from entertainment tax under Scheme of Incentive for Tourism Project, 1995 to 2000 for giving boost to tourism sector: Scheme offering incentive for recouping or covering capital investment:

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Is capital receipt: Dy. CIT vs. Inox Leisure Ltd.; 351 ITR 314 (Guj):

The assessee was engaged in the business of operating multiplexes and theatres in Pune and Baroda. During the previous year relevant to the A. Y. 2003-04 the assessee received an amount of Rs. 1,14,47,905/- by way of exemption from payment of entertainment tax relating to its Baroda multiplex unit. The exemption was granted by the State Government under the New Package Scheme of Incentive for Tourism Projects 1995 to 2000. Likewise, the assessee also received a similar entertainment tax exemption of Rs. 1,85,06,998/- from the State of Maharashtra under its own incentive scheme for its multiplex unit at Pune. The assessee claimed that the incentives were granted for covering the capital outlay and, therefore, the receipt was capital in nature. The Assessing officer treated the receipt as revenue receipt. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) The character of receipt of a subsidy in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is granted. In other words, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. If the object of the subsidy is 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 the scheme is to enable the assessee to set up a new unit or expand the existing unit then the receipt of subsidy would be on capital account.

ii) The salient features of the scheme showed that the incentive was being offered for recouping or covering a capital investment or outlay already made by the assessee.

iii) The Tribunal was right in holding that the entertainment exemption of Rs. 1,85,06,998/- and Rs. 1,14,47,905/- in respect of Pune and Baroda multiplexes, respectively, was a capital receipt, which was not eligible to tax for the A. Y. 2003-04.”

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Capital or revenue receipt: Entertainment subsidy: Object of subsidy to promote cinema houses by constructing Multiplex Theatres: Subsidy is capital receipt:

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CIT vs. Chaphalkar Bros.; 351 ITR 309 (Bom):

The following question was raised before the Bombay High Court in this case:

“Whether the entertainment duty subsidy given to the assessee by the State Government for construction of multiplexes is in the nature of revenue receipt or capital receipt?”

The High Court held as under:

“i) The purpose for which the subsidy was given is the relevant factor and if the object of subsidy was to enable the assessee to setup a new unit then the receipt of subsidy would be on capital account.

ii) Since the object of the subsidy was to promote construction of multiplex theatre complexes, the subsidy would be on capital account. The fact that the subsidy was not meant for repaying the loan taken for construction of multiplexes should not be ground to hold that the subsidy receipt was on revenue account because if the object of the scheme was to promote cinema houses by constructing multiplex theatres, irrespective of whether the multiplexes had been constructed out of the assessee’s own funds or borrowed funds, the receipt of subsidy would be on capital account.

iii) Therefore, the decision of the Tribunal that the amount of subsidy received by the assessee is on capital account could not be faulted.”

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Capital gains: Exemption u/s. 54/54F: A. Y. 2007-08: A residential house includes a building with a basement, ground floor, first floor and second floor constituting two residential units: Exemption allowable:

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CIT vs. Gita Duggal; 257 CTR 208 (Del): 214 Taxman 51 (Del): 30 Taxman.com 320 (Del):

Under a development agreement the assessee received by way of consideration Rs. 4 crore and a building consisting of basement, ground floor, first floor and the second floor constituting two residential units. In the computation of income for the A. Y. 2007-08, the assessee had computed capital gain with reference to the cash consideration of Rs. 4 crore. The Assessing Officer estimated the cost of construction of the said building at Rs. 3,43,72,529/- and included the same in the total sale consideration. The Assessing Officer rejected the assessee’s claim for exemption u/s. 54, but allowed the claim for exemption u/s. 54F in respect of one residential unit. The assessee’s reliance on the judgment of the Karnataka High Court in CIT vs. D. Anand Basappa; (2009) 309 ITR 329 (Kar) was not accepted by the Assessing Officer. Accordingly, he recomputed the capital gain and made an addition of Rs. 98,20,722/-. The CIT(A) allowed the assessee’s claim following the judgment of the Karnataka High Court. The Tribunal upheld the decision of the CIT(A).

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

“i) Fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the exemption u/s. 54/54F. It is neither expressly nor by necessary implication prohibited.

ii) Tribunal was therefore justified in allowing exemption u/s. 54F in respect of entire investment in construction of a building consisting of two residential units.”

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Business expenditure: Fines and penalties: Section 37(1) : A. Y. 2004-05: Dishonour of export commitment in view of losses: Encashment of bank guarantee by Export Promotion Council: Payment recorded as penalty in assessee’s books and claimed as deduction: Compensatory in nature:

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Deduction allowable: CIT vs. Regalia Apparels Pvt. Ltd.; 352 ITR 71 (Bom):

The assessee is a manufacturer of garments. The Apparel Export Promotion Council granted to the assessee entitlements for export of garments and knit ware. In consideration of the export entitlements, the assessee furnished a bank guarantee in support of its commitment that it shall abide by the terms and conditions in respect of the export entitlements and produce proof of shipment. It was also provided that failure to fulfill the obligation to export would render the bank guarantee liable to being forfeited/ encashed. In view of the fact that the assessee was incurring losses, it decided not to utilise the export entitlements. This led the Council to encash the bank guarantee. The assessee recorded the payment as penalty in its books of account. The assessee claimed deduction of the said amount u/s. 37 of the Income-tax Act, 1961 for the A. Y. 2004-05. The Assessing Officer disallowed the claim holding that it is in the nature of penalty. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) The finding of fact recorded by the Commissioner (Appeals) and upheld by the Tribunal was that the assessee took a business decision not to honour its commitment of fulfilling the export entitlements in view of losses being suffered by it. The Assessing Officer did not dispute the fact nor did he doubt the genuineness of the claim of the expenditure being for business purposes.

ii) In these facts the Tribunal held that the assessee had not contravened any provisions of law and, thus, the forfeiture of the bank guarantee was compensatory in nature u/s. 37(1) of the Act.

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Search and seizure: Block assessment: Section 158BC; Block period 01-04-1986 to 26-06- 1996: Undisclosed income to be determined on basis of evidence found during search: Cannot be computed on the basis of best judgment:

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CIT vs. Dr. Ratan Kumar Singh; 357 ITR 35 (All)

The assessee was a practicing medical doctor having different sources of income such as income from agricultural activities, medical profession and pathology. On 25-09-1996, a search u/s. 132 at the residential premises of the assessee was simultaneously conducted with a survey u/s. 133A at his business premises where an x-ray clinic and blood bank were located. During the survey a register marked pertaining to the blood bank was found and seized. Another register pertaining to x-ray was also seized. No search was conducted at the business premises of the assessee from where these registers were impounded. The assessing Officer made an assessment u/s. 158BC of the Act, of the assessee’s undisclosed income for the block period making additions pertaining to the blood bank and x-ray. The Tribunal deleted the addition.

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

i) Undisclosed income of the block period has to be determined on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence with certain other conditions. It is not open to the Assessing Officer to compute the income on the basis of best judgment.

ii) A search was conducted at the residential premises of the assessee and survey was conducted at the business premises. During the search, no cash, bullion, jewellery or any material was found, which could be considered as undisclosed income.

iii) The additions were made on estimate basis after seizing the register from the business premises of the assessee. The Tribunal was justified in deleting the addition.”

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Salary: Perquisite: Sections 15 and 17(2): A. Y. 1994-95: Assesee R but NOR: Employer to bear the tax on salary: Assessee paid tax of Rs. 50 lakh: Got reimbursement from employer of Rs. 35 lakh: Salary received by the assessee to be enhanced by Rs. 35 lakh only and balance Rs. 15 lakh paid by assessee not to be enhanced:

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CIT vs. Jaydev H. Raja; 261 CTR 408 (Bom):

The assesee a resident but not ordinarily resident individual was an employee of Coca Cola Inc. USA having salary income. Under the tax equalisation policy framed by the company, the assessee’s tax liability arising out of his foreign assignment was to be borne by the company. In the relevant year, the assessee had received salary of Rs. 77 lakh and the tax payable thereon was Rs. 35 lakh which was reimbursed by the employer. The assessee returned the total income of Rs. 1.12 crore ( 77 + 35 lakh) and paid tax thereon of Rs. 50 lakh. The Assessing Officer made an addition of Rs. 15 lakh treating the same as the amount reimbursable by the employer. The Tribunal allowed the assessee’s appeal and held that though the assesee had paid the tax amounting to Rs. 50 lakh, the assessee was entitled to reimbursement of tax amounting to Rs. 35 lakh only from the employer and the balance Rs. 15 lakh was borne out of the salary income received by the assessee in India.

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

“Only the actual reimbursement of tax by the employer could be included in the salary of the employee and not the tax paid by employee from his salary income for the purposes of grossing up u/s. 195A.”

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Revision: Scope: Section 263: A. Y. 2006-07: CIT feeling inquiry inadequate: CIT must make enquiry and show that assessment order was erroneous: CIT has no power to remand and direct AO to conduct enquiry:

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DIT vs. Jyoti Foundation: 357 ITR 388 (Del):

For the A. Y. 2006-07, the assessment was completed u/s. 143(3) r/w. section 147, making enquiry as regards the consideration on sale of the four plots. Subsequently, exercising powers u/s. 263 of the Act, the Commissioner held that the enquiry made by the Assessing Officer was inadequate and therefore directed the Assessing Officer to make fresh enquiry and pass a fresh order of assessment. The Tribunal cancelled the order of the Commissioner passed u/s. 263.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under: “
i) Revisionary power u/s. 263, is conferred by the Act on the Commissioner/Director of Income-tax when an order passed by the lower authority is erroneous and prejudicial to the interest of the Revenue, but orders which are passed after inquiry/ investigation on the question/issue are not per se or normally treated as erroneous and prejudicial to the interest of Revenue because the revisionary authority feels and opines that further inquiry/investigation was required or deeper or further scrutiny should be undertaken.

ii) In cases where there is inadequate enquiry but not lack of enquiry, the Commissioner must record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the Commissioner and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in law. An order of remit cannot be passed by the Commissioner to ask the Assessing Officer to decide whether the order was erroneous.

iii) Inquiries were certainly conducted by the Assessing Officer. It was not a case of no inquiry. The order u/s. 263 itself recorded that the Director felt that the inquiries were not sufficient and further inquiries and details should have been called for. The inquiry should have been conducted by the Director himself to record the finding that the assessment order was erroneous. He should not have set aside the order and directed the Assessing Officer to conduct the inquiry. iv) We do not think any substantial question of law arises for consideration. The appeal is dismissed.”

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Rectification: Interest: Sections 154 and 244A: A. Y. 2002-03: While giving effect to order of CIT(A) the assessee was allowed refund with interest u/s. 244A: Rectification u/s. 154 to withdraw interest is not sustainable: Question whether there was delay and to whom the delay was attributable is a debatable question of fact:

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CIT Vs. Nathpa Jhakri Joint Venture; 261 CTR 110 (Bom):

In the assessment order giving effect to the order of the CIT(A), the Assessing Officer allowed refund and also interest u/s. 244A of the Income-tax Act, 1961. Subsequently, the Assessing Officer passed a rectification order withdrawing the interest allowed u/s. 244A of the Act. The Tribunal allowed the assessee’s appeal and cancelled the rectification order.

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

“Whether or not, there was a delay in the proceedings and to whom is such delay attributable is a question of fact, requiring investigation and therefore interest granted u/s. 244A could not be withdraw by rectification u/s. 154.”

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Penalty: Sections 139A and 272B: A. Y. 2003- 04: Quoting PAN in TDS certificates: Failure: Where assessee-deductor did not mention PAN of deductees on TDS certificates issued by it, as same was not provided by deductees within time prescribed, there was reasonable cause for non-compliance of section 139A(5A), and, therefore, penalty u/s. 272B could not be imposed:

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CIT vs. Gail (India) Ltd.; [2013] 36 taxmann.com 336 (All)

The assessee, a public sector undertaking, had deducted income tax at source as per the provisions of sections 194C and 194J on all the payments made to contractors/professionals during the financial year 2002-03. The tax so deducted was also deposited by it in the government treasury in time. The annual return of TDS as per the provisions of section 203 was also filed in the prescribed ‘Form 26C’ and TDS certificates were issued to contractors/professionals. However, penalty at the rate of Rs. 10,000 for each 350 defaults committed by the respondent-assessee was imposed by the revenue on the ground that the respondent-assessee has not mentioned PAN in Form 16A issued to 350 contractors. The assessee’s contention that there was reasonable cause for not mentioning the PAN in Form 16A since the deductee had not provided the PAN was rejected and penalty was imposed. The Tribunal deleted the penalty, holding that there was reasonable cause for default.

On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under “
i) A perusal of section 139A(5A) shows that it puts an obligation on the person receiving any sum or income or amount from which tax has been deducted under the provisions of Chapter XVII (which include sections 194C and 194J) to intimate his permanent account number to the person responsible for deducting such tax under the Chapter. In the present case, it is clear that it was statutory obligation of the contractors, who received certain amounts from the respondent-assessee, from which tax was deducted under the provision of Chapter XVII-B, to intimate their permanent account number to the respondent-assessee.

ii) It is the specific stand of the assessee that certain contractors had not intimated their permanent account number, and for that reason it could not be mentioned in Form 16A issued to such contractors. Section 139A(5B) makes it obligatory for every person deducting tax under Chapter XVII-B to quote the permanent account number of the person to whom such sum or income or amount has been paid by him. Thus, reading both the provisions together, namely, sections 139A(5A) and section 139A(5B), it appears that the deductor may be at fault under section 139A(5B) if he does not quote the permanent account number of the persons to whom the amount has been paid, despite the intimation of permanent account number by such person to the deductor u/s. 139A(5A) of the Act. There is nothing on record to show that the contractors to whom certain amounts were paid by the respondentassessee, had intimated their permanent account number to the respondent-assessee as required u/s. 139A(5A). In the circumstances, therefore, the assessee successfully explained the reasonable cause to satisfy the provisions of section 273B.

iii) Considering the provisions of section 272B, 273B and sections 139A(5A) and 139A (5B), a bare reading of the provision itself makes it clear that the penalty u/s. 272B would not ordinarily be imposed, unless the assessee had either acted deliberately in defiance of law or was guilty of conduct which is contumacious, dishonest or acted in conscious disregard to its obligation. The penalty u/s. 272B cannot be imposed merely because it is lawful to do so. It can be imposed for failure to perform statutory obligation. The imposition of penalty for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially, after considering the explanation of reasonable clause submitted by the assessee and on a consideration of all the relevant circumstances.

iv) On the findings recorded by the Tribunal that there was no revenue loss and mere technical breach, it clearly satisfies the test of reasonable cause u/s. 273B. In the present case the levy of penalty u/s. 272B by the assessing authority was fully unjustified.”

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Income from industrial undertaking: Deduction u/s. 80-IB and 80-IC: A. Ys. 2004-05 and 2006-07: Transport subsidy, power subsidy, interest subsidy and insurance subsidy resulting in increase of profits of the undertaking: Such increased profit is income derived from the industrial undertaking and is eligible for deduction u/s. 80-IB/80-IC of the Act:

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CIT vs. Meghalaya Steels Ltd.; 356 ITR 235 (Gau): 261 CTR 17 (Gau):

The assessee’s industrial unit was eligible for deduction u/s. 80-IB/80-IC of the Income-tax Act, 1961. For the relevant years, the Assessing Officer disallowed the claim for deduction in respect of the profit relating to the transport subsidy, power subsidy, interest subsidy and insurance subsidy. The Tribunal held that the subsidies in question would go on to reduce the corresponding expenses incurred and the resultant profit would be the profits and gains of the business of the industrial undertaking, that all these subsidies are interlinked, interlaced and having a direct nexus with the manufacturing activities of the assessee which are inseparable from the expenditure incurred by the assessee on account of transportation of purchase as well as sales, power, interest, insurance cover of the business of the assessee and, therefore, there is a direct nexus between the subsidy received by the asessee’s industrial undertaking and the resulting profits and gains thereof and the assessee is eligible for deduction u/s. 80-IB/80-IC of the Act.

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

i) Transport subsidy, power subsidy, interest subsidy and insurance subsidy received under various Government Schemes go to reduce the cost of gains derived by it and there is direct and first degree nexus between the industrial activities of the assessee on one hand, and the subsidies received by it on the other.

ii) The profits and gains earned on the strength of such subsidies are profits and gains derived by, the industrial undertaking and are deductible under the provisions of section 80—IB or section 80-IC as the case may be.”

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Business expenditure: Disallowance u/s. 40(a)(ia): A. Y. 2007-08: Amendment by Finance Act, 2010 permitting TDS payment till due date for filing return of income is retrospective:

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CIT vs. Rajinder Kumar (Del); ITA No. 65 of 2013 dated 01-07-2013, 06-09-2013:

For the A. Y. 2007-08, the Assessing Officer found that TDS on the expenses of Rs. 78,51,800/- paid in the month of March 2007 was deposited in April 2007. The Assessee contended that the said expenditure should be allowed since the TDS has been deposited within the due date. The Assessing Officer disallowed the said amount of Rs. 78,51,800/- relying on the provisions of section 40(a)(ia) of the Income-tax Act, 1961 on the ground that TDS has been deposited after March 2007. The Tribunal allowed the assessee’s claim relying on the decision of the Calcutta High Court in the case of CIT vs. Vergin Creations, ITA No. 302/11, G.A. No. 3200/11 dated 23/11/2011, wherein it has been held that the proviso to section 40(a)(ia) of the Act, amended by the Finance Act, 2010 has retrospective effect. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under: “i) The intention behind section 40(a)(ia) is to ensure that TDS is deducted and paid. The object of introduction of section 40(a)(ia) is to ensure that TDS provisions are scrupulously implemented without default in order to augment recoveries. It is not to penalise an assesee when payment has been made within the time stated.

ii) Failure to deduct TDS or deposit TDS results in loss of revenue and may deprive the Government of the tax due and payable. The provision should be interpreted in a fair, just and equitable manner. It should not be interpreted in a manner which results in injustice and creates tax liabilities when TDS has been deposited/paid and the Respondent who is following cash system of accountancy has made actual payment to the third party for services rendered.

iii) Also, section 40(a)(ia), prior to the insertion of the proviso by the Finance Act, 2010, was not free from interpretative difficulties and problems. The amended provisions are clear and free from any ambiguity and doubt and help curtail litigation. The amended provision clearly support the view that the expression “said due date” used in clause A of proviso to the unamended section refers to the time specified in section 139(1) of the Act. The amended section 40(a)(ia) expands and further liberalises the statutes when stipulates that deductions made in the first eleven months of the previous year but paid before the due date for filing of the return, will constitute sufficient compliance.

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filing appeal by Revenue: Instruction No. 3 of 2011, dated 9-2-2011 is retrospective: Department must show ‘cascading effect’.

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[CIT v. Varsha Dilip Kohle (Bom.) (Aurangabad Bench); ITA No. 7 of 2010 dated 5-3-2012]

In this appeal filed by the Revenue in the year 2010 the tax amount in dispute was Rs.6,69,770. CBDT Instruction No. 3 of 2011, dated 9-2-2011 prescribed the limit of Rs.10,00,000 for filing an appeal before the High Court u/s.260A of the Income-tax Act, 1961. The High Court observed that since the tax effect does not exceed Rs.10 lakh, the appeal is required to be dismissed in view of the CBDT Instruction No. 3 of 2011, dated 9-2-2011.

The Department contended that (i) as the appeal has been filed prior to the issuance of the Circular, the Circular did not apply; and (ii) as the appeal had a ‘cascading effect’ involved a ‘common principle’, the appeal could not be dismissed in view of the Supreme Court’s verdict in Surya Herbals.

The Bombay High Court dismissed the appeal and held as under: “

(i) In CIT v. Smt. Vijaya V. Kavekar, (Tax Appeal No. 78 of 2007 with Tax Appeal No. 76 of 2007) decided on 29-7-2011, a Division Bench of this Court, while interpreting the very Circular No. 3 of 2011, has held that the Circular has a retrospective operation and instructions contained in the Circular would apply even to the pending cases.

(ii) As regards Surya Herbals case, the appeal does not involve any ‘cascading effect’ as the Department has not shown whether there are other appeals which raise the same point.”

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Educational Institution: Exemption u/s. 10(22):A. Y. 1998-99: Denial of exemption disputing genuineness of transaction: Contributor to assessee denying the transaction: Assessee should be given opportunity to cross-examine the disputant:

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Sri Krishna Educational and Social Trust vs. ITO; 351 ITR 178 (Mad):

For the A. Y. 1998-99, the Assessing Officer made additions denying exemption u/s. 10(22) of the Income-tax Act, 1961, disputing the genuineness of a transaction wherein the contributor to the assessee had denied transaction. The assessee was not given the opportunity to cross-examine the said person. The Tribunal upheld the decision of the Assessing Officer. The Tribunal held that the assesee did not have the right to cross-examine the witness who made the adverse report, especially when the records did not indicate that the assessee had made any attempt to produce witnesses.

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

 “i) When the authorities entertained a doubt about the genuineness of the transaction, the Tribunal ought to have afforded the assessee an opportunity to cross examine the disputant. The Revenue had not accepted the explanation given by the assessee. The assessee would not have expected one of the contributors to have denied the factum of contribution. This view was inevitable because but for this the assessee would not have opted to cross-examine the contributor.

 ii) Therefore, when there was unexpected change of facts, the party should not be deprived of the opportunity to cross-examine the witness branded as the assessee’s witness. The Evidence Act also permits a party to cross-examine his own witness under stated circumstances.

 iii) Unless it is proved that the income derived was covered u/s. 10(22) it could not be decided whether the addition u/s. 68 was possible or not. Therefore, the matter was remitted to the Assessing Officer for further consideration in the light of the legal position.”

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Capital or revenue receipt: Test: A. Y. 1997- 98: assessee receiving amount in terms of release agreement: Compensation for loss of source of income: Capital receipt: Not taxable:

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Khanna and Annadhanam vs. CIT; 351 ITR 110 (Del):

The assessee is a firm of Chartered Accountants. Since 1983, the assessee had an arrangement with a foreign firm whereunder the foreign firm referred work to the assessee through a Calcutta firm in respect of clients based in Delhi and nearby areas. The arrangement was reduced to writing in 1992. In 1996, the foreign firm wanted a firm of Chartered Accountants of Bombay to represent its work in India. Accordingly, an agreement was entered into on 14-11-1996, which was called a release agreement, under which the assessee was to no longer represent the foreign firm in India and thereafter the foreign firm would not refer any work to the assessee. In consideration of the termination of the services of the assessee, the assessee received an amount of Rs. 1,15,70,000/- in terms of the release agreement. The assessee claimed the amount to be capital receipt. The assessing Officer assessed the amount as professional income. The CIT(A) deleted the addition. The Tribunal upheld the decision of the Assessing Officer.

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

“i) The fact that the assessee continued its business or its usual operations even after termination of an agency is of no consequence. If the receipt represents compensation for the loss of a source of income, it would be capital and it matters little that the assessee continues to be in receipt of income from its other similar operations.

 ii) There was no evidence that the assessee had entered into similar arrangements with other international firms of Chartered Accountants. The arrangement with the foreign firm was in operation for a fairly long period of 13 years and had acquired a kind of permanency as a source of income. When that source was unexpectedly terminated, it amounted to the impairment of the profit-making structure or apparatus of the assessee. It was for that loss of the source of income that the compensation was calculated and paid to the assessee.

 iii) The compensation was thus a substitute for the source. Therefore, the amount of Rs. 1,15,70,000/- received by the assessee in terms of the release agreement represented a capital receipt, not assessable to tax.”

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Capital gains: Forfeiture of earnest money: Section 51 r/w. s. 4: A. Y. 2007-08: Earnest money forfeited on cancellation of sale agreement is capital receipt: Not taxable as income:

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CIT vs. Meera Goyal; 30 Taxman.com (Del):

The assessee entered into an agreement to sell his house property to a company and in terms of agreement received certain sum as earnest money Since purchaser failed to pay balance consideration by stipulated period, the assessee forfeited the earnest money and claimed same as capital receipt. The Additional Commissioner on reference u/s. 144A directed the Assessing Officer to the effect that earned money so received and forfeited was to be adjusted against the cost of property and capital gain was to be worked out on the basis of the resultant cost as and when the property was sold. However, the Assessing Officer held that entire transaction was a sham transaction in which purchaser attempted to book bogus losses. He accordingly made addition of the forfeited amount. The Commissioner (Appeals) deleted the addition. The Tribunal upheld the order of Commissioner (Appeals) observing that the earnest money was received through banking channels and genuineness of the receipt was not in dispute.

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

“i) The Tribunal has rightly noted that the provisions of section 51 would come into play as it specifically covers this type of a transaction. Once the transaction has been held to be genuine, there is no question of the transaction being without any consideration.

ii) Consequently, there is no merit in the revenue’s appeal, much less any substantial question of law.”

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Recovery: Stay of demand pending appeal: Section 220(6) : A. Y. 2010-11: Stay can be granted on the basis of the merits even if there is no financial hardship:

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UTI Mutual Fund vs. ITO (Bom); WP(L) No. 523 of 2013 dated 06-03-2013:

In respect of the A. Y. 2010-11, the application of the petitioner u/s. 220(6) for keeping the demand in abeyance till the disposal of the appeal was rejected by the Assessing Officer. The Assessing Officer refused to follow the order of the Bombay High Court (see. UTI Mutual Fund vs. ITO; 345 ITR 71 (Bom); wherein stay was granted in similar circumstances for the preceding year. CIT also rejected application for stay.

On a writ petition filed by the Petitioner challenging the order of rejection, the Department relied on the order of the Karnataka High Court in CIT vs. IBM India Pvt. Ltd.(Kar); ITA No. 31 of 2013 dated 04-02-2013, taking the view that in a revenue matter an interim order should be passed only in the case of genuine financial hardship and not otherwise.

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

“i) The order of the Karnataka High Court cannot be read to mean that consideration of whether an assessee has made out a strong prima facie case for stay of enforcement of a demand is irrelevant. Nor is the law to the effect that except a case of financial hardship, no stay on the recovery of demand can be granted even though a strong prima facie case is made out.

 ii) In considering whether a stay of demand should be granted, the Court is duty bound to consider not merely the issue of financial hardship if any, but also whether a strong prima facie case raising a serious triable issue has been raised which would warrant a dispensation of deposit. That is a settled position in the jurisprudence of our revenue legislation. In CEAT Ltd. vs. UOI; 2010 (250) E.L.T. 200 (Bom), the Division Bench of this Court has held as follows. “If the party has made out a strong prima facie case, that by itself would be a strong ground in the matter of exercise of discretion as calling on the party to deposit the amount which prima facie is not liable to deposit or which demand has legs to stand upon, by itself would result in undue hardship of the party.”

 iii) Where a strong prima facie case is made out calling upon the petitioner to deposit, would itself occasion undue hardship. Where the issue has raised a strong prima facie case which requires serious consideration as in the present case, the requirement of predeposit would itself be a matter of hardship.

iv) Finally, we express our serious disapproval of the manner in which the Revenue has sought to brush aside a binding decision of this Court in the case of the assessee on the issue of the stay on enforcement for the previous year. The rule of law has an abiding value in our legal regime. No public authority, including the Revenue, can ignore the principle of precedent. Certainty, in tax administration is of cardinal importance and its absence undermines public confidence.

 v) For these reasons, we direct that pending the disposal of the appeals for the A. Y. 2010-11 and for a period of six weeks thereafter, no coercive steps shall be taken against the assessee for the recovery of the demand in pursuance of the impugned notices dated 25-02-2013.”

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Revision: Power of Commissioner: section 264: A.Y. 1996-97: Exempt income offered for taxation by mistake: Commissioner not justified in rejecting application for revision.

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For the A.Y. 1996-97, in the return of income the assessee had offered an amount of Rs.7,18,050 being interest on FCNR deposits as taxable income. In appeal, the Commissioner (Appeals) had remanded the matter to the Assessing Officer. In the course of fresh assessment proceedings, the assessee realised that the interest of FCNR deposits was exempt u/s.10(15) (iv)(fa) of the Income-tax Act, 1961. Therefore, by a letter dated 5-1-2000, the assessee requested the Assessing Officer to exclude the amount from the taxable income. The Assessing Officer did not consider the request. The assessee, preferred a revision application u/s.264 to the Commissioner requesting for the relief. The Commissioner rejected the revision application.

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

“(i) The income-tax authorities under the Incometax Act, 1961, are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is overasses-sed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.

(ii) Once the assessee had approached the Commissioner u/s.264, the Commissioner was required to apply his mind to whether the assessee was entitled to the relief prayed for. He was not justified in dismissing the application merely on the ground that it was the assessee who had shown the interest as his income for the year under consideration.

(iii) The Commissioner (Appeals) upon appreciation of the evidence on record had, as a matter of fact, found that the assessee was not ordinarily resident during the relevant periods. The present year fell between the said assessment years. Hence, it was apparent that the assessee was ‘not ordinarily resident’ for the year under consideration. The Commissioner was, therefore, not justified in rejecting the application u/s.264.”

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Export profit: Deduction u/s.80HHC: A.Y. 1998- 99: Supply of food and beverages to foreign airlines leaving India: Amount received deemed to be convertible foreign exchange: Assessee entitled to deduction u/s.80HHC.

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The assessee engaged in the business of hotelier supplied food and beverages in sealed containers to international flights leaving India. Such foods and beverages were cleared for transmission to the aircrafts and were also escorted by the Customs authorities at international airports. The Assessing Officer disallowed the claim for deduction u/s.80HHC of the Income-tax Act, 1961. The disallowance was upheld by the Tribunal.

On appeal by the assessee, it was contended by the Revenue that the assessee had charged sales tax on those items of food and beverages from the airline authority and such conduct itself indicates that the transactions were sales of items within the country. The Calcutta High Court reversed the decision of the Tribunal and held as under:

“(i) Though the word ‘export’ has not been defined in the Act, the word is to be interpreted in the light of the language of section 80HHC including the Explanation added thereto and if the formalities required in section 80HHC are fully complied with, it is not necessary that all the other formalities prescribed under the Customs Act, 1962, for export of the articles also required to be fully complied with by an assessee in addition to those prescribed u/s.80HHC.

(ii) There is no estoppel for the mistake of an assessee in treating the actual nature of transaction and the taxing authority cannot refuse to give appropriate benefit of deduction of tax merely for the mistake of an assessee if the mistake is lawfully rectified. If the assessee had wrongly realised sales tax on the item of export by treating the sale as within the State, the law would take its own course for such wrong action of the assessee, but such fact could not be a ground for refusing a just benefit available under the Act.

(iii) The certificate issued by the Commissioner of Customs indicated that the assessee in the process of selling the food and beverages in the airport had complied with the conditions mentioned in Explanation (aa) of section 80HHC. The Foreign Exchange Department, RBI certified that the provisions regarding treatment of the amounts received in rupees by a hotel company out of repatriable funds would also apply under the Foreign Exchange Management Regulations. In the absence of any evidence disputing the assertion of the officer concerned, the assessee had also complied with in condition mentioned in Explanation (a) and (aa) of section 80HHC of the Act.

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Export: Exemption u/s.10B: A.Y. 2003-04: Assessee an approved EOU and manufacturing articles for export: Some work done on job basis by sister concern: Not relevant: Assessee entitled to exemption u/s.10B.

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The assessee was an approved export-oriented unit and was manufacturing articles for export and was eligible for exemption u/s.10B of the Income-tax Act, 1961. For the A.Y. 2003-04, the Assessing Officer disallowed the exemption u/s.10B on the ground that the assessee had done some work on job basis from its sister concern. The Tribunal allowed the assessee’s claim.

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

“(i) There was no dispute that the assessee was an approved export-oriented unit and making exports. The authorities below recorded a finding that the assessee was involved in manufacture of an article or thing and the mere fact that it was getting some works done on job basis from its sister concern would not deprive the assessee of its claim to be an export-oriented manufacturing unit.

(ii) The Assessing Officer himself had recorded in respect of the assessee’s own case for the A.Y. 2004-05 that its unit fulfilled the conditions u/s.10B and allowed deduction. Even for the A.Y. 2005-06, the appeal filed by the assessee had already been allowed by the Commissioner (Appeals) holding the assessee to be entitled to claim deduction u/s.10B.

(iii) The assessee was entitled to exemption u/s.10B for the A.Y. 2003-04.”

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Depreciation: Intangible assets: section 32(1) (ii): A.Y. 2004-05: Depreciation is allowable on abkari licence u/s.32(1)(ii).

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The assessee was owning a bar attached hotel. For the A.Y. 2004-05, the assessee claimed depreciation on the value of the abkari licence u/s.32(1)(ii) of the Income-tax Act, 1961 as an intangible asset. The Assessing Officer disallowed the claim. The Tribunal observed that purchase of licence is a capital asset, but held that the assessee is not entitled to depreciation as the abkari licence does not depreciate.

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

“Abkari licence is a business right given to the party to carry on liquor trade. The abkari licence squarely falls u/s.32(1)(ii) on which the assessee is entitled to depreciation at 25% of the written down value.”

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Salary: Benefit or perquisite: A. Ys. 1996-1997 to 2001-02: Assessees directors of company CRS: CRS effected its sale through franchisees which were owned by HUFs of assesses: Assessing Officer treated personal expenses of assessees and their family members paid by company as income of assessee’s by invoking section 2(24)(iv): Addition not proper:

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CIT vs. Srivatsan; 213 Taxman 413 (Mad): 30 Taxman. com 423 (Mad):

The assessees were directors of the company ‘CRS’ which was engaged in the business of retail-selling of silk sarees and other textiles. ‘CRS’ effected its sale through franchisees which were owned by different HUFs of the assessee. Said franchisees were paid commissions for the sale effected by them. The Assessing Officer treated the personal expenses of the assessees and their family members (Franchisee commission paid to different HUF) paid by the company as the income of the Directors, by invoking the provisions of section 2(24)(iv). The Tribunal held that the personal expenses met out of the company’s money could not be treated as income in the hands of the assessees u/s. 2(24)(iv) as the money had not been paid directly to them, but to the franchisees, which their HUF owned.

In appeal, the Revenue contended that when the factum of each of the Directors, having received benefit towards the personal expenses, was not disputed, it was irrelevant and immaterial whether such expenses were directly paid by the company or through franchisees. The Madras High Court upheld the decision of the Tribunal and held as under:

 “i) The Tribunal has taken note of the following aspects and has given the specific findings:-

a) CRS paid franchise commission to various firms owned by HUF of Directors.

b) This has been done on the basis of agreement entered into which were in force.

c) The payment by CRS on the basis of franchise agreement to various persons cannot be treated as payment to Directors who have substantial interest in the company and section 2(24)(iv) cannot be invoked.

ii) The findings rendered by the Tribunal do not warrant any interference, as it is supported by factual matrix and legal reasoning.”

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Capital gain: Exemption u/s.10(38): A. Y. 2006-07: Assessee company and other group companies held 98.73% shares in BFSL which owned a land: They sold those shares to DLFCDL for a consideration of Rs. 89,28,36,500/- and claimed exemption u/s. 10(38): AO denied exemption holding that it is a sale of land: Denial of exemption not proper:

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Bhoruka Engineering Industries Ltd. vs. Dy. CIT; 261 CTR 287 (Karn):

The assessee company and other group companies were holding 98.73% of the shares in BSFL which owned a land. They sold those shares to DLFCDL for a consideration of Rs. 89,28,36,500/- and claimed exemption u/s10(38) of the Income-tax Act, 1961. The Assessing Officer held that land was transferred to DLFCDL by way of said circuitous transaction, and the shareholders being owners of the land to the extent of their shareholdings in the company, the gains arising to the assessee are chargeable to tax as short term capital gain on sale of land. Accordingly, he disallowed the claim for exemption u/s. 10(38) of the Act. The Tribunal allowed the assessee’s claim for exemption.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under: “
i) The assessee and other group concerns holding 98.3% shares of BSFL having sold their entire shareholding in that company to another company for valuable consideration after complying with the legal requirements, the transaction cannot be said to be a colorable device to avoid payment of tax on the basis that the effect of the transfer of shares is transfer of immovable property belonging to BFSL in favour of the purchaser of the share.

ii) The assessee having fulfilled all the conditions stipulated u/s. 10(38), the benefit of tax exemption cannot be denied merely because in case a registered sale deed had been executed by BFSL selling the land in favour of the purchaser, tax would have been paid on the capital gain.”

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Waiver of interest : S. 234A, S. 234B and S. 234C of Income-tax Act, 1961 and CBDT Circular No. 400/234/95-IT(B), dated 23-5-1996 : A.Ys. 1991-92 and 1992-93 : Death of father who was looking after business : Entire tax paid voluntarily and extra amount a

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Reported :


  1. Waiver of interest : S. 234A, S. 234B and S. 234C of
    Income-tax Act, 1961 and CBDT Circular No. 400/234/95-IT(B), dated 23-5-1996 :
    A.Ys. 1991-92 and 1992-93 : Death of father who was looking after business :
    Entire tax paid voluntarily and extra amount also paid : Sufficient reason for
    non-payment of advance tax on time : Levy of interest set aside.

[V. Akilandeswari v. CCIT, 318 ITR 1 (Mad.)]

The petitioner was a minor during the A.Ys. 1991-92 and
1992-93. For these two years the returns were filed voluntarily and taxes were
paid. Assessment was completed and interest was levied u/s.234A, u/s.234B and
u/s.234C of the Income-tax Act, 1961. The petitioner’s application for waiver
of interest was rejected by the Chief Commissioner.

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

“(i) The fact of the death of the petitioner’s father who
was looking after the business and as well as that the petitioner’s mother
and guardian was a housewife unfamiliar with such transactions was not
denied by the Chief Commissioner. The petitioner had paid the entire tax
voluntarily and had also paid some extra amount. The claim made by the
petitioner was bona fide and genuine and the Chief Commissioner had
not exercised his discretion in terms of law.

(ii) Thus the levy if interest u/s.234A, u/s.234B and u/s.234C was set
aside and the petitioner did not need to pay any interest for the two
assessment years. The petitioner was not entitled to seek refund of the excess
amount if any paid.”

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TDS : S. 194A and S. 201 of Income-tax Act, 1961 : A.Y. 2003-04 : Discount allotted to subscribers of chit : Discount is not interest : No liability to deduct tax u/s.194A : Order u/s.201 not valid.

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Reported :


  1. TDS : S. 194A and S. 201 of Income-tax Act, 1961 : A.Y.
    2003-04 : Discount allotted to subscribers of chit : Discount is not
    interest : No liability to deduct tax u/s.194A : Order u/s.201 not valid.

[CIT v. Sahib Chits (Delhi) (P) Ltd., 226 CTR 119
(Del.)]

The assessee is a chit fund company. The assessee had not
deducted tax at source on the amounts paid to its members on the chits
contributed by them. The AO held that there was default on the part of the
assessee company for not deducting tax u/s.194A of the Income-tax Act, 1961.
Therefore, the AO passed order u/s.201 and quantified the default amount at
Rs.8,17,683. CIT(A) and the Tribunal quashed the order.

On appeal by the Revenue, the following two questions were
raised :

“(a) Whether the Tribunal was correct in law in holding
that the assessee had not paid any interest to the subscribers of the chit
and such payment does not fall within the meaning of interest as defined
u/s.2(28A) of the Act ?

(b) Whether the Tribunal was correct in law in holding
that the assessee was not required to deduct the tax at source within the
meaning of S. 194A of the Act and as such the assessee was not in default
u/s.201 of the Act ?”

The Delhi High Court upheld the decision of the Tribunal
and held as under :

“Distribution of bid amount or discount allotted to the
subscriber of the chit is not interest as there is no money borrowed or debt
incurred and therefore there is no question of deducting tax at source
u/s.194A.”

 

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TDS : S. 194I of Income-tax Act, 1961 : A.Ys. 2001-02 and 2002-03 : Premises owned by co-owners : Limit of Rs.1,20,000 is applicable to each co-owner.

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Reported :


  1. TDS : S. 194I of Income-tax Act, 1961 : A.Ys. 2001-02 and
    2002-03 : Premises owned by co-owners : Limit of Rs.1,20,000 is applicable to
    each co-owner.

[CIT v. Manager, SBI; 226 CTR 310 (Raj.)]

In an appeal filed by the Revenue u/s.260A of the
Income-tax Act, 1961 the following question was raised :

“Whether on the facts and in the circumstances of the
case, the learned Tribunal was legally justified in holding with regard to
TDS u/s.194-I of the Income-tax Act, 1961 that when there are a number of
owners of a property, the limit or ceiling will apply to each and every
owner separately, notwithstanding the fact that the amount has been paid by
crediting the aggregate sum in the joint account of the owners ?”

The Rajasthan High Court held as under :

“(i) The property was of late Smt. Tej Roop Kumari, who
created registered trust in her lifetime on 10th October 1990, according to
which, her three sons and one grandson became absolute owners of the
property in definite shares.

(ii) Learned counsel for the appellant has placed
reliance on Smt. Bishaka Sarkar v. UOI; 219 ITR 327 (Cal.), in which
it was held that rent paid to co-owners cannot be split up and co-owners
would come within the expression ‘other cases’, so deduction of tax at the
rate of 20% was justified.

(iii) It appears that the learned Judge of Calcutta High
Court did not take note of law laid down by the Apex Court in CIT v.
Bijoy Kumar Almal;
215 ITR 22 (SC), in which it was held that where
property is owned by two or more persons and their respective shares are
definite and ascertainable, they shall not, in respect of such property, be
assed as an AOP and that the share of each such person in the income from
that property shall be included in his total income, meaning thereby,
liability to deduct on the rental income received by each co-owner was to be
judged.

(iv) Thus, limit of Rs.1,20,000 was applicable to each
co-owner, and thus, no tax was to be deducted at source, and the learned
Tribunal has not committed any error in accepting the appeals of the
assessee.”

 

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Return of income : Doctrine of relation back : S. 140 of Income-tax Act, 1961 : A.Y. 2004-05 : Return signed by company secretary : Defect curable : Subsequent valid return though filed late relates back to original return.

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Reported :


  1. Return of income : Doctrine of relation back : S. 140 of
    Income-tax Act, 1961 : A.Y. 2004-05 : Return signed by company secretary :
    Defect curable : Subsequent valid return though filed late relates back to
    original return.

[CIT v. Haryana Sheet Glass Ltd., 318 ITR 173
(Del.)]

For the A.Y. 2004-05, the assessee-company had filed its
return of income on 1-11-2004 declaring a loss of Rs.10,38,98,405, which was
signed by the company secretary. Thereafter a revised return was filed on
5-10-2005 declaring loss of Rs.7,20,50,041, which was signed by the managing
director. The AO ignored the original return on the ground that the return was
not signed and verified in accordance with the provisions of S. 140 of the
Income-tax Act, 1961. He further found that the revised return was filed
belatedly and therefore he did not take the said return into consideration.
The Tribunal held that signing of the return by the secretary was a curable
irregularity. Therefore, when the managing director signed and filed the
return, it should relate back to the date when the original return was filed
under the signature of the company secretary. Since that original/revised
return was within time, it could have been taken into consideration.

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

“(i) If the irregularity in the original return is
curable, then the doctrine of relation back would apply, but if there is a
fundamental defect in the original return, which cannot be cured, then such
a doctrine cannot be applied.

(ii) It is clear that the secretary has signed the
return, who is otherwise, as per the provisions of the Companies Act,
competent to sign. The provision of S. 140 of the Income-tax Act mandates
that the managing director or some other responsible officers can sign.
Because of this reason, we are of the opinion that in a case like this, the
irregularity was curable and the doctrine of relation back was rightly
applied.”

 

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Return of income : Defective/invalid return : S. 140 of Income-tax Act, 1961 : A.Y. 1994-95 : Return signed by company secretary : Defect curable : Opportunity to rectify defect should be given.

New Page 1

Reported :


  1. Return of income : Defective/invalid return : S. 140 of
    Income-tax Act, 1961 : A.Y. 1994-95 : Return signed by company secretary :
    Defect curable : Opportunity to rectify defect should be given.


[CIT v. Bhiwani Synthetics Ltd., 318 ITR 177 (Del.)]

For the A.Y. 1994-95, the assessee company had filed its
return of income on 30-11-1994 declaring a loss. The return was signed by the
general manager (finance) and the company secretary of the assessee. The
Assessing Officer came to the conclusion that since the return was not signed
by the managing director or a director as provided in S. 140(c) of the
Income-tax Act, 1961, it was non est. The CIT(A) held that the defect
was a curable defect and an opportunity ought to have been given to the
assessee to rectify it. He, accordingly, directed the Assessing Officer to
give such an opportunity to the assessee. The Tribunal upheld the decision of
the CIT(A).

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

“(i) We are of the view that on the facts of this case,
since there is nothing on record to suggest that the assessee has disowned
the return that was signed by the general manager (finance) of the assessee
and on the contrary, a power of attorney was given by the assessee to its
general manager (finance) for signing the return, it would have been
appropriate if an opportunity had been granted to the assessee to have the
return signed by the managing director or its director in accordance with
the directions given by the CIT(A).

(ii) There is nothing to suggest that any prejudice will
be caused to the Revenue if this direction is complied with.”


 

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Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 : Exemption cannot be denied on the ground that it is not a trust: Filing of Form No. 10 : Revised form can be filed before completing assessment.

New Page 1

Reported :


  1. Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 :
    Exemption cannot be denied on the ground that it is not a trust: Filing of
    Form No. 10 : Revised form can be filed before completing assessment.

[CIT v. Simla Chandigarh Diocese Society, 318 ITR 96
(P&H)]

The assessee, a charitable society, claimed exemption
u/s.11 r.w. S. 12(1) of the Income-tax Act, 1961. The Assessing Officer
declined the claim on the ground that the assessee was a society and not a
trust. The Assessing Officer also raised objection that revised Form No. 10
was not furnished with the return. The Tribunal allowed the assessee’s claim.

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

“(i) The assessee could not be denied exemption u/s.11 of
the Act on the ground that it was not a trust but a society.

(ii) The Commissioner (Appeals) had observed that the
assessee modified Form No. 10 in the course of assessment proceedings. The
modified Form No. 10 has been rejected by the Assessing Officer on the
ground that there was no provision in the Act for revising Form No. 10. It
was held that there was no specific bar prohibiting the assessee from
modifying the figure of accumulation. Form No. 10 could be furnished before
the assessing authority completes the concerned assessment.”

 

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Depreciation : S. 32 of Income-tax Act, 1961 : A.Ys. 2000-01 and 2001-02 : User of asset : Asset discarded and written off : Depreciation is allowable on WDV after reducing scrap value of asset discarded and written off.

New Page 1

 Reported :


  1. Depreciation : S. 32 of Income-tax Act, 1961 : A.Ys.
    2000-01 and 2001-02 : User of asset : Asset discarded and written off :
    Depreciation is allowable on WDV after reducing scrap value of asset discarded
    and written off.

[CIT v. Yamaha Motor India (P) Ltd., 226 CTR 304
(Del.)]

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

“(a) Whether the Income-tax Appellate Tribunal
(hereinafter ‘Tribunal’) was correct in law in directing the AO to recompute
the depreciation after reducing scrap value of the assets, which have been
discarded and written off in the books of account for the year under
consideration from the WDV of the block of assets ?

(b) Whether provisions of sub-clause (iii) to S. 32(1)
r/w. S. 43(6)(c)(B) are applicable to the present case when the assessee had
not complied with the primary conditions for eligibility of depreciation ?”

The Delhi High Court held as under :

“(i) The crux of the matter is : what is the meaning to
be ascribed to the expression ‘used for the purposes of the business’ as
found in S. 32 of the Income-tax Act, 1961. The provisions of S. 32 pertain
to depreciation. The contention of the Revenue is that with respect to any
machinery for which depreciation is claimed u/s.32, the same cannot be
allowed unless such machinery is used in the business and since
discarded machinery is not used in the business, therefore, with respect to
the discarded machinery no depreciation can be allowed.

(ii) As long as the machinery is available for use,
though not actually used, it falls within the expression ‘used for the
purposes of the business’ and the assessee can claim the benefit of
depreciation.

(iii) No doubt, the expression used in S. 32 is ‘used for
the purposes of the business’. However, this expression has to be read
harmoniously with the expression ‘discarded’ as found in clause (iii) of
Ss.(1). Obviously, when a thing is discarded it is not used. Thus ‘use’ and
‘discarding’ are not in the same field and cannot stand together. However,
if a harmonious reading of the expressions ‘used for the purposes of the
business’ and ‘discarded’ is adopted, then it would show that ‘used for the
purposes of the business’ only means that the assessee has used the
machinery for the purposes of the business in earlier years. It is not
disputed that in the facts of the present case, the machinery in question
was in fact used in the previous year and depreciation was allowed on the
block of assets in the previous years. Taking therefore a realistic approach
and adopting a harmonious construction, the expression ‘used for the
purposes of the business’ as found in S. 32 when used with respect to
discarded machinery would mean that the user in the business is not in the
relevant financial year/previous year, but in the earlier financial years.
Any other interpretation would lead to an incongruous situation.

(iv) Therefore, the Tribunal was correct in law in
directing the AO to recompute depreciation after reducing the scrap value of
the assets which have been discarded and written off in the books of account
for the year under consideration from the WDV of the block of assets.”

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Educational institution : Exemption u/s. 10(23C)(vi) of Income-tax Act, 1961 : Society running various educational institutions : Object of society also to serve church and nation : Not a ground for rejection of approval for exemption.

New Page 1

Reported :

  1. Educational institution : Exemption u/s. 10(23C)(vi) of
    Income-tax Act, 1961 : Society running various educational institutions :
    Object of society also to serve church and nation : Not a ground for rejection
    of approval for exemption.

[Ewing Christian College Society v. CCIT, 318 ITR
160 (All.)]

The petitioner-society ran various educational institutions
in the State of UP and it was not for the purpose of making profit. Its
application for approval for exemption was rejected by the Chief Commissioner
on the ground that the purposes for which the society has been established
were religious in nature and consequently the society could not be said to
exist solely for the purpose of education.

On a writ petition filed by the petitioner, the Allahabad
High Court held as under :

“(i) Merely because the object of the petitioner-society
was also to serve the church and the nation, that would not mean that the
educational institution was not existing solely for educational purposes.

(ii) Thus the order passed by the Chief Commissioner
could not be sustained and was set aside. The Chief Commissioner was
directed to pass a fresh order.”

 

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Charitable purpose : Exemption u/s. 10(23C)(iv) of Income-tax Act, 1961 : Petitioner-foundation created for imparting, spreading and promoting knowledge, learning, education, etc. in fields related to profession of accountancy : Clearly falls in category

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Reported :

 

  1. Charitable purpose : Exemption u/s. 10(23C)(iv) of
    Income-tax Act, 1961 : Petitioner-foundation created for imparting, spreading
    and promoting knowledge, learning, education, etc. in fields related to
    profession of accountancy : Clearly falls in category of institutions which
    are devoted to research and are of charitable nature : Petitioner entitled to
    exemption u/s.10(23C)(iv).

[ICAI Accounting Research Foundation v. DGIT
(Exemption),
226 CTR 27 (Del.)]

The petitioner-foundation was set up by the Institute of
Chartered Accountants of India (ICAI), the main object of the petitioner being
to make it an academy for imparting, spreading and promoting knowledge,
learning, education and understanding in the various fields relating to
profession of accountancy, like accounting, auditing, fiscal laws and policy,
corporate and economic laws and policies, economics, financial management,
financial services, capital and money markets, management information and
capital systems, management consultancy services and allied disciplines. The
petitioner’s application for exemption u/s.10(23C)(iv) of the Income-tax Act,
1961 was rejected stating that the petitioner-foundation did not qualify for
exemption.

On a writ petition filed by the foundation the Delhi High
Court directed the Director General of I.T. (Exemption) to grant exemption to
the petitioner-foundation and held as under :

“(i) The objective of the petitioner-foundation would
fall within the expression ‘education’, as appearing in the definition
u/s.2(15).

(ii) On the basis of the activities of the foundation,
there is not even an iota of doubt that the petitioner-foundation is
involved in education and, thus, meets the description of ‘charitable
institution’.

(iii) Services provided to various Government bodies were
the research projects which were given to the petitioner-foundation having
regard to its expertise in this field. Therefore, these activities per se
would not bring out the petitioner-foundation out of the ambit of S. 2(15).
It can be said that the activities amounted to ‘advancement of an object of
general public utility’, which also appears in the definition of charitable
purpose in S. 2(15).

(iv) The only aspect, in this backdrop, which needs to be
considered is as to whether charging of amount from the MCD, KMC, etc. for
undertaking these research projects would make the activity commercial.
Merely because some remuneration was taken by the petitioner-foundation for
undertaking these projects would not alter the character of these objects,
which remained research and consultancy work. The important test is the
application of the amount received from those projects. It is nowhere
disputed that the receipts are utilised by the petitioner-foundation for the
advancement of its objectives. It is clear that most of the amount received
qua these projects was spent on the project and surplus, if any, is used for
advancement of the objectives for which the petitioner-foundation is
established.

(v) The amended definition of ’charitable purpose’ would
not alter this position. No doubt, proviso to this definition clarifies that
advancement of any other object of general public utility will not be
treated as charitable purpose if it involves the carrying on of any activity
in the nature of trade, commerce or business. However, what is not
appreciated by the respondent No. 1 is that merely on undertaking those
research projects at the instance of the Government/local bodies, the
essential character of the petitioner-foundation cannot be converted into
the one which carries on trade, commerce or business or activity of
rendering any service in relation to trade, commerce or business.

(vi) The impugned order of the respondent No. 1 is,
accordingly, set aside. Direction/mandamus is given to the respondent No. 1
to accord requisite exemption to the petitioner-foundation u/s.10(23C)(iv).”

 

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Bad debts : Deduction u/s.36(1)(vii) of Income-tax Act, 1961 : A.Y. 2005-06 : Disallowance u/s.14A : Exemption u/s.80HHC allowed : Deduction of bad debts cannot be disallowed u/s.14A.

New Page 1





Reported :

  1. Bad debts : Deduction u/s.36(1)(vii) of Income-tax Act,
    1961 : A.Y. 2005-06 : Disallowance u/s.14A : Exemption u/s.80HHC allowed :
    Deduction of bad debts cannot be disallowed u/s.14A.

[CIT v. Kings Exports, 318 ITR 100 (P&H)]

The assesse was engaged in manufacture and export of
engineering goods. The assessee’s claim for deduction of bad debts
u/s.36(1)(vii) of the Income-tax Act, 1961 was disallowed by the AO on the
ground that the assessee had claimed deduction u/s.80HHC and the claim for bad
debts would be hit by S. 14A of the Act. The Tribunal allowed the assessee’s
claim.

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

“U/s.80HHC and u/s.14A, the expenditure incurred from
export income could not be held to be for earning income which did not form
part of total income, which concept was dealt with u/s.10 of the Act. S.
80HHC deals with deduction of the element of profit from export from taxable
income. Therefore, the claim of bad debt could not be disallowed.”

 

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Business expenditure : Disallowance u/s. 14A of Income-tax Act, 1961 : In the absence of nexus between exempt income and expenditure in question established by Revenue, the provisions of S. 14A cannot be applied.

New Page 1

 

Unreported :

  1. Business expenditure : Disallowance u/s. 14A of Income-tax
    Act, 1961 : In the absence of nexus between exempt income and expenditure in
    question established by Revenue, the provisions of S. 14A cannot be applied.


[CIT v. M/s. Hero Cycles Ltd. (P&H), ITA No. 331 of
2009 dated 4-11-2009]

The assesse is engaged in manufacturing of cycles and parts
of two-wheelers in multiple units. It earned dividend income, which is
exempted u/s. 10(34) and u/s.(35) of the Income-tax Act, 1961. The AO made an
inquiry whether any expenditure was incurred for earning this income and as a
result of the said inquiry, addition of Rs.3,48,04,375 was made by way of
disallowance u/s.14A(3) of the Act. The Tribunal deleted the addition and
observed as under :

“(i) We find that the plea of the assessee that the
entire investments have been made out of the dividend proceeds, sale
proceeds, debenture redemption, etc., is borne out of record. One aspect
which is evident is that the interest income earned by the main unit exceeds
the expenditure by way of interest incurred by it, thus obviating the
application of S. 14A of the Act. Even with regard to the funds of the main
unit, the fund flow position explained shows that only the non-interest
bearing funds have been utilised for making the investment.

(ii) Thus, on facts we do not find any evidence to show
that the assessee has incurred interest expenditure in relation to earning
the tax exempt income in question. Therefore, merely because the assessee
has incurred interest expenditure on funds borrowed in the main unit, it
would not ipso-facto invite the disallowance u/s.14A, unless there is
evidence to show that such interest-bearing funds have been invested in the
investments which have generated the ‘tax exempt dividend income’.

(iii) As noted earlier, there is no nexus established by
the Revenue in this regard and therefore, on a mere presumption, the
provisions of S. 14A cannot be applied. In fact, in the absence of such
nexus, the entire addition made is required to be deleted. We accordingly
hold so.”

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

“(i) Learned counsel for the appellant relies upon S.
14A(2) and Rule 8D(1)(b) to submit that even where the assessee claimed that
no expenditure had been incurred, the correctness of such claim could be
gone into by the AO and in the present case, the claim of the assessee that
no expenditure was incurred was found to be not acceptable by the AO and
thus disallowance was justified. We are unable to accept the submission.

(ii) In view of the finding reproduced above, it is clear
that the expenditure on interest was set off against the income from
interest and the investment in shares and funds were out of the dividend
proceeds. In view of this finding of fact, disallowance u/s.14A was not
sustainable.

(iii) Whether, in a given situation, any expenditure was
incurred which was to be disallowed, is a question of fact. The contention
of the Revenue that directly or indirectly some expenditure is always
incurred which must be disallowed u/s.14A and the impact of expenditure so
incurred cannot be allowed to be set off against the business income which
may nullify the mandate of S. 14A, cannot be accepted.

(iv) Disallowance u/s.14A requires finding of incurring
of expenditure. Where it is found that for earning exempt income, no
expenditure has been incurred, disallowance u/s.14A cannot stand. In the
present case finding on this aspect, against the Revenue, is not shown to be
perverse. Consequently, disallowance is not permissible.”


 

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Income : Excess cash received at cash counters of bank : Liable to be repaid to the real owner : Not income of assessee.

New Page 2

6 Income : Excess cash
received at cash counters of bank : Liable to be repaid to the real owner : Not
income of assessee.


[CIT v. Bank of Rajasthan
Ltd.,
326 ITR 526 (Bom.)]

The assessee-bank claimed
that the excess cash received at the cash counter is liable to be repaid to the
real owner and therefore it cannot be treated as income of the assessee. The
Assessing Officer did not accept this contention and treated the excess cash as
income of the assessee. The Tribunal allowed the assessee’s claim. The Tribunal
held that the liability on account of excess cash received at the cash counters
of the bank represents the liability to pay the customers as and when they may
demand payment. The Tribunal, therefore held that it can not be considered as
income of the assessee.

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

“(i) Before the Tribunal
reliance was placed on the cash manual of the assessee which provides that the
bank has to make a record of the excess cash, this has to be considered as
liability of the bank and the collection is required to be handed back to the
real owner in accordance with the prescribed procedure.

(ii) The reasoning of the
Tribunal has not been demonstrated to suffer from any perversity.

(iii) The question raised
does not give rise to any substantial question of law.”

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Income : Accrual of : Amount due to assessee in terms of royalty agreement : Dispute between parties and arbitration proceedings pending : No accrual of income : Assessment only on completion of arbitration proceedings.

New Page 2

5 Income : Accrual of :
Amount due to assessee in terms of royalty agreement : Dispute between parties
and arbitration proceedings pending : No accrual of income : Assessment only on
completion of arbitration proceedings.


[FGP Ltd. v. CIT, 326
ITR 444 (Bom.)]

The assessee had a royalty
agreement with one M/s. UPT, under which certain amounts were payable to the
assessee. The assessee company had not received any amount as UPT had denied
that any amount was due and payable by it to the assessee-company and
arbitration proceedings were pending. The Assessing Officer added the amount to
the total income of the assessee holding that the income has accrued. The
Tribunal upheld the addition.

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

“(i) The real income of
the assessee can be assessed and the test before the income can be taxed is
whether there is real accrual of income.

(ii) There was no real
accrual of income. There was dispute between the parties which was pending in
arbitration during the assessment year. The income received by the assessee
would be liable to be assessed only after passing of an award.”

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Charitable purpose : Registration u/s.12A of Income-tax Act, 1961 : Rejection on the ground that amended deed not produced : Amended deed is not a pre-requisite condition : Matter remanded.

New Page 2

4 Charitable purpose :
Registration u/s.12A of Income-tax Act, 1961 : Rejection on the ground that
amended deed not produced : Amended deed is not a pre-requisite condition :
Matter remanded.


[CIT v. R. M. S. Trust,
326 ITR 310 (Mad.)]

The assessee, a charitable
trust, came into existence on December 1, 1995. On 10-3-2006 the assessee-trust
filed application for registration u/s.12A. The application was belated by more
than 10 years for which condonation petition was filed stating that the delay
was due to ignorance of law. The Commissioner of Income-tax noticed that the
requisite clause indicating that any amendment to the trust deed would be
carried out after obtaining approval from the Commissioner of Income-tax, has
not been incorporated, and on that ground directed the assessee-trust to file an
amended deed duly registered along with notes on the activities of the trust
with regard to various expenses debited in the income and expenditure account.
The assessee did not respond to the letter. Therefore, the Commissioner held
that the assessee-trust was not entitled to registration u/s.12AA and exemption
u/s.80G(vi) of the Act. The Tribunal allowed the assessee’s appeal.

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

“(i) The amended trust
deed is not a pre-requisite as required by the Commissioner and it is also not
a pre-requisite condition for registering the applicant as a trust as per the
provisions of the Act. The requisition made by the Commissioner is an
extra-statutory requisition.

(ii) Hence, the Tribunal,
by reason of the impugned order, had set aside the rejection made by the
Commissioner and remitted to decide the issue afresh after affording a
reasonable opportunity of being heard.

(iii) We do not find any
reason to interfere with the order of the Tribunal.”

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Charitable or religious trust : Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 : Additional condition by way of Explanation to S. 11(2) inserted w.e.f. 1-4-2003 is to apply only to accumulations in excess of 15% u/s. 11(2) and not to accumulation

New Page 2

3 Charitable or religious
trust : Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 : Additional
condition by way of Explanation to S. 11(2) inserted w.e.f. 1-4-2003 is to apply
only to accumulations in excess of 15% u/s. 11(2) and not to accumulations up to
15% u/s.11(1)(a).


[DIT Exemption v. Bagri
Foundation,
192 Taxman 309 (Del.)]

The assessee was a trust
duly registered u/s.12AA and duly recognised u/s.80G(5)(vi) of the Income-tax
Act, 1961. For the relevant year, i.e., A.Y. 2003-04, the assessee had
shown certain gross income and deducted therefrom the amount applied for
charitable purposes by way of donation to another charitable trust, BLB, as
corpus donation and to others. The source of the amount over and above the
income of the year was the accumulation of income of the past. The AO added the
amount of donations to the income of the assessee, holding that owing to the
Explanation appended to S. 11(2) with effect from the A.Y. 2003-04, any donation
made out of income accumulated or set apart during the period of accumulation or
thereafter to any trust or institution registered u/s.12AA was liable to be
added in the income of the donor-trust. On appeal, the Commissioner (Appeals)
deleted the addition holding the donation by the assessee to BLB trust was made
out of excess of income over expenditure and not out of amount accumulated
u/s.11(1)(a). The Tribunal affirmed the order of the Commissioner (Appeals).

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

“(i) It is clear from S.
11(1)(a) that the income applied for charitable purposes is not to be included
in the total income for the relevant year. In CIT v. Shri Ram Memorial
Foundation,
(2004) 269 ITR 35/140 Taxman 263 (Delhi), the Court has held
that when a donor-trust, which is itself a charitable and religious trust,
donates its income to another trust, the provisions of S. 11(1)(a) can be said
to have been met by such donor-trust and the donor-trust can be said to have
applied its income for religious and charitable purposes, notwithstanding the
fact that the donation is subject to a condition that the donee-trust will
treat the donation as towards its corpus and can only utilise the accruing
income from the donated corpus for religious and charitable purposes.

(ii) Explanation to S.
11(2) inserted w.e.f. 1-4-2003, provides that the amount accumulated cannot be
donated to another trust. The Explanation to S. 11(2) is nothing but an
additional condition attached to accumulation in excess of 15% permitted
u/s.11(2). It cannot be held as a condition on accumulation up to 15% as
provided for in S. 11(1)(a) also. There is no rational classification for
imposing the restriction as contained in the Explanation to the accumulation
up to 15% also when there is no such restriction to donating the entire income
of a year to another charitable trust.

(iii) If the Legislature
intended to completely ban/discourage inter se donation between trusts,
it would have changed the position as existing in law, as noticed in the case
of Shri Ram Memorial Foundation (supra). The Legislature did not do so.

(iv) Even after the
insertion of the Explanation, if a trust donates its entire income for a year
to another charitable trust, it would still be entitled to exemption
u/s.11(1)(a). It defies logic as to why such donations cannot be permitted out
of 15% accumulation permitted u/s.11(1)(a) itself.

(v) There is, however,
rationale for imposing the restriction as contained in the Explanation to
accumulations in excess of 15%. Such accumulations, but for the conditions
imposed in S. 11(2) and in the Explanation aforesaid, would have been liable
to be taxed. One of the conditions in S. 11(2)(a) is the purpose for which
accumulation in excess of 15% being made is to be notified; another condition
is of the accumulation being permitted for a period not exceeding 5 years; yet
another condition is as to the modes in which the accumulation can be
invested. There are no such restrictions on accumulation u/s.11(1)(a).

(vi) The scheme of the
Section indicates that the additional condition by way of the aforesaid
Explanation is intended to apply only to accumulations in excess of 15%
u/s.11(2) and not to accumulations up to 15% u/s.11(1)(a). The Explanation is
not found to be intended to take away something from the accumulation up to
15% permitted without any condition whatsoever u/s.11(1)(a).

(vii) It also followed
that even if the donations by the assessee were to be out of accumulations
from previous years and not out of surplus reserves, the same would still not
be liable to be included in the total income as assessed by the Assessing
Officer and the orders of the Commissioner (Appeals) and the Tribunal would
still be upheld. It was nobody’s case that the said accumulations were beyond
the accumulation of 15% permitted in S. 11(1)(a).”

levitra

Charitable purpose : Exemption u/s.11 : S. 11, S. 12A and S. 13(1)(d) of Income-tax Act, 1961 : A.Y. 2005-06 : Interest-free loan by assessee-society to another society : Loan neither ‘investment’, nor ‘deposit’ : Both societies having similar objects, re

New Page 2

2 Charitable purpose :
Exemption u/s.11 : S. 11, S. 12A and S. 13(1)(d) of Income-tax Act, 1961 : A.Y.
2005-06 : Interest-free loan by assessee-society to another society : Loan
neither ‘investment’, nor ‘deposit’ : Both societies having similar objects,
registered u/s.12A and approved u/s.80G : Loan later repaid : Assessee entitled
to exemption u/s.11.


[DIT (Exemption) v. Acme
Educational Society,
(Del.)]

For the A.Y. 2005-06, the
Assessing Officer disallowed the claim of the assessee-society for exemption
u/s.11 of the Income-tax Act, 1961 on the ground that the assessee-society had
given a loan of Rs.90,50,000 to another educational society, whose president was
the brother of the president of the assessee-society. The Assessing Officer held
that there was a violation of S. 13(1)(d) read with S. 11(5) of the Act. The
Commissioner (Appeals) allowed the assessee’s claim and held that there was no
violation of S. 13(1)(d) read with S. 11(5) of the Act, as both societies had
similar objects and that the Assessing Officer had not brought anything on
record to show that the advance of Rs.90,50,000 was a ‘deposit’ or ‘investment’.
The Tribunal upheld the decision of the Commissioner (Appeals).

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


“(i) The interest-free
loan of Rs.90,50,000 given by the assessee-society to another society did
not violate S. 13(1)(d) read with S. 11(5) of the Act, as the loan was
neither an ‘investment’, nor a ‘deposit’. Moreover both societies had
similar objects and were registered u/s.12A of the Act and had approvals
u/s.80G.

(ii) The fact that the
loan was interest-free and had been subsequently returned was also
significant.”



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Appellate Tribunal : Rectification u/s.254(2) of Income-tax Act, 1961 : A.Y. 1994-95 : Appellate order u/s.254(1) gets merged in rectification order only on issues raised in rectification application and not on other issues decided by Tribunal in appeal,

New Page 2

1 Appellate Tribunal :
Rectification u/s.254(2) of Income-tax Act, 1961 : A.Y. 1994-95 : Appellate
order u/s.254(1) gets merged in rectification order only on issues raised in
rectification application and not on other issues decided by Tribunal in appeal,
Appellate order u/s.254(1) survives and is available for rectification again on
any other issue on an application filed by either of parties : Once
rectification application filed by one of parties is considered and decided by
Tribunal rightly or wrongly, another rectification application on same issue is
not maintainable.


[CIT v. Aiswarya Trading
Co.,
192 Taxman 385 (Ker.)]

For the A.Y. 1994-95, while
deciding the appeal, the Tribunal did not consider one of the grounds raised by
the assessee pertaining to the levy of interest u/s.220(2) of the Income-tax
Act, 1961. Therefore, the assessee filed rectification application before the
Tribunal to rectify the Appellate order, which was allowed by the Tribunal. The
Department thereafter filed a rectification application for rectifying the order
issued by the Tribunal in the assessee’s rectification application. The Tribunal
held that the Department’s rectification application was on the very same issue
agitated by the assessee in its rectification application and allowed by the
Tribunal and, therefore, it was not maintainable u/s.254(2).

On appeal, the Revenue
contended that by virtue of the merger of the rectification order in the
Appellate order, the application filed u/s.254(2) by the Revenue was still
maintainable.

The Kerala High Court upheld
the decision of the Tribunal and held as under :


“(i) The second
application on the very same issue is not maintainable before the Tribunal.
In fact, merger applies only on issues decided in rectification proceedings
and the Tribunal’s order issued u/s.254(1) will remain unaffected on all
matters other than those covered by the rectification order issued
u/s.254(2). In other words, even after the Tribunal rectifies the Appellate
order u/s.254(2) on any issue raised, still the original order can be
rectified on any other issue decided by the Tribunal.

(ii) However, if the
rectification application filed by one of the parties is allowed or rejected
by the Tribunal, the very same issue cannot be agitated in another
rectification application by the opposite party. If this is done and allowed
to be entertained by the Tribunal, then what happens is that the Tribunal
gets an opportunity to review its own order for which it has no powers under
the statute. Therefore, once the rectification application filed by one of
the parties is considered and decided by the Tribunal rightly or wrongly,
another rectification application on the same issue is not maintainable
against the order issued by the Tribunal u/s.254(2).

(iii) In the instant
case, the question of liability for interest payable by the assessee u/s.
220(2) rightly or wrongly was decided by the Tribunal in the rectification
application filed by the assessee in its favour and, therefore, the
Department could not seek to rectify the very same order again u/s.254(2) by
filing another application.

(iv) Consequently, the
order of the Tribunal was to be upheld.”



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Valuation of closing stock : Change in method of valuation as per AS 2 : Resultant variation in income : Not taxable.

New Page 2

11 Valuation of closing stock : A.Y.
2001-02 : Change in the method of valuation as per Accounting Standard 2, which
is mandatory : Resultant variation in income : Not taxable.


[CIT v. George Oakes Ltd., 303 ITR 357 (Mad.)]

For the A.Y. 2001-02, the Assessing Officer made an addition
representing the reduction of profit due to change in the method of valuing the
closing stock. In the relevant year the closing stock was valued in accordance
with the Accounting Standard 2, which is mandatory. The Tribunal deleted the
addition on the ground that that the change of accounting method was bona
fide
.

 

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

“(i) When the change of accounting method is bona fide
and is recognised in accounting principles, the resultant variation in income
cannot be forced to be taxed upon the assessee.

(ii) Being compulsory, the company had adopted the
Accounting Standard (AS-2) as per the guidelines prescribed by the ICAI. There
was a specific finding that the assessee valued its opening stock in one way
and the closing stock in another method, during the relevant year when the
Accounting Standard (AS-2) had come into effect in the earlier year. The
change in the accounting method had not been found to have been made with a
mala fide
intention. Such a change in the method of accounting was bona
fide
and was made mandatory by the ICAI to be followed in the preparation
of financial accounts. Under such circumstances, in the year of change, some
discrepancy was bound to happen in the profitability of the company as
compared to the previous year. However, in succeeding years, there would not
be any discrepancy on this account.

(iii) The reasons given by the Tribunal were based on valid materials and evidence, and did not warrant any interference.”

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TDS : Works contract : S. 194C : Purchase of packing material carrying printed work : Essentially a sale/purchase : Not a works contract : Purchaser not liable to deduct tax at source.

New Page 2

10 TDS : Works contract : S. 194C of
Income-tax Act, 1961 : A.Y. 2005-06 : Purchase of packing material carrying
printed work : Essentially a sale/purchase : Not a works contract : Purchaser
not liable to deduct tax at source.


[CIT v. Dy. Chief Accounts Officer, Markfed, Khanna,
304 ITR 17 (P&H)]

The assessee had purchased printed packing material, but did
not deduct tax at source on the payment therefor. The Assessing Officer was of
the view that the transaction was a works contract. Therefore, he levied penalty
and interest for not deducting tax at source u/s.194C of the Income-tax Act,
1961. The Tribunal deleted the penalty and the interest.

 

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

“(i) There was no dispute that the main purpose of the
assessee in buying packing material was to obtain goods for the purpose of
packing its finished products. The factum of such packing material carrying
some printed work could only be regarded as the work executed by the supplier
incidental to the sale to the assessee. The fact of some printing being done
as a part of supply was of no consequence to the contract being essentially of
a sale of chattel. The predominant object underlying the contracts was
sale/purchase of goods and the only intention of the assessee was to buy
packing material.

(ii) Admittedly, the raw material for the manufacturing of
such packing material was not supplied by the assessee. Thus, it was a case of
sale and not a contract for carrying out any work.

(iii) The purchase of particular printed packing material
by the assessee was a contract for sale and outside the purview of S. 194C.”

 


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Investment allowance : S. 32A : Dumpers, tippers and hydraulic excavators are construction equipment vehicles, not road transport vehicles : Eligible for investment allowance

New Page 2

8 Investment allowance : S. 32A of
Income-tax Act, 1961 : A.Ys. 1989-90, 1990-91 and 1992-93 : Dumpers, tippers
and hydraulic excavators are construction equipment vehicles and not road
transport vehicles : Eligible for investment allowance.


[CIT v. Gotan Lime Stone Khanij Udyog, 170 Taxman
442 (Raj.)]

The assessee was engaged in the business of running
hydraulic excavators and tippers for cement companies on hire basis by
realising rent for operation of the same. For the A.Ys. 1989-90, 1990-91 and
1992-93, its claim for investment allowance on the hydraulic excavators and
tippers was declined by the Assessing Officer on the ground that they were
road transport vehicles and, moreover, the same were not used by the assessee
for its own business. The Commissioner(A) and the Tribunal allowed the
assessee’s claim.

 

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

“(i) Under the Motor Vehicles Act, 1989, the dumpers,
tippers and hydraulic excavators are construction equipment vehicles within
the definition of Rule 2(ca) of the 1989 Rules and are non-transport
vehicles by virtue of Explanation attached to this definition, and cannot be
categorised as road transport vehicles for the purpose of entitlement of
investment allowance u/s.32A.

(ii) The construction equipment vehicles like dumpers,
tippers and hydraulic excavators are not road transport vehicles and profit
gained out of it by letting them out on hire basis to a cement producing
industrial undertaking could not debar them from claiming investment
allowance u/s.32A.”

Penalty : Concealment of income : S. 271(1)(c) : Estimated addition : No evidence of concealment of income : Penalty could not be imposed

New Page 2

9 Penalty : Concealment of income : S.
271(1)(c) of Income-tax Act, 1961 : A.Y. 1992-93 : Estimated addition : No
evidence of concealment of income : Penalty could not be imposed.


[CIT v. Sangrur Vanaspati Mills Ltd., 303 ITR 53
(P&H)]

For the A.Y. 1992-93, the assessee had filed return of
income disclosing income of Rs.65,18,970. The Assessing Officer rejected the
accounts, estimated the sales and made an addition of Rs.66,16,865. The
Assessing Officer also imposed penalty u/s.271(1)(c) of the Income-tax Act,
1961 for concealment of income. The Tribunal deleted the penalty on the ground
that there was no conclusive evidence that sales estimated by the Assessing
Officer were made outside the books of account.

 

On appeal by the Revenue, the Punjab and Haryana High Court
held that the Tribunal was justified in cancelling the penalty.

 


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Export profit : Deduction u/s.80HHC of Income-tax Act, 1961 : A.Y. 2001-02 : Separate accounts maintained for export sales and domestic sales : Deduction not to be on basis of total turnover of all business : Assessee entitled to deduction fully on export

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6 Export profit : Deduction u/s.80HHC of
Income-tax Act, 1961 : A.Y. 2001-02 : Separate accounts maintained for export
sales and domestic sales : Deduction not to be on basis of total turnover of all
business : Assessee entitled to deduction fully on export profits.


[CIT v. M. Gani and Co., 301 ITR 381 (Mad.)]

The assessee was a manufacturer of garments and fancy items
and an exporter. For the A.Y. 2001-02 the assessee claimed deduction u/s.80HHC
of the Income-tax Act, 1961 on the export turnover ignoring the results of
domestic turnover. The Assessing Officer considered the composite turnover
comprised of both export turnover and domestic turnover and recomputed the
deduction u/s. 80HHC. The Tribunal allowed the claim of the assessee.

 

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

“The assessee having maintained separate books of account
for export business and domestic business, it was entitled to deduction
u/s.80HHC of the Act fully on the export profit.”

 


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