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Category: In the High Courts: Part A-Reported Decisions

Business expenditure: Deduction only on actual payment: Ss. 43B and 36(1)(va) of I. T. Act, 1961: A. Y. 2002-03: Employee’s contribution to PF: Paid beyond due date under PF Act but before due date for filing return of income: Deduction allowable in the r

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Not Reported
:

49 Business expenditure: Deduction only on actual payment:
Ss. 43B and 36(1)(va) of I. T. Act, 1961: A. Y. 2002-03: Employee’s contribution
to PF: Paid beyond due date under PF Act but before due date for filing return
of income: Deduction allowable in the relevant year:


[CIT
Vs. Animil Ltd. (Del); ITA No1063 of 2008 dated 23/12/2009]


 

In the previous year relevant to the A. Y. 2002-03 the
assessee had paid the employer’s contribution and the employees’ contribution
towards Provident Fund and ESI after the due date, as prescribed under the
relevant Act/Rules. The Assessing Officer made additions of Rs. 42,58,574/-
being employees’ contribution u/s. 36(1)(va) of the Income-tax Act, 1961 and Rs.
30,68,583/- being employer’s contribution u/s. 43B of the Act. The CIT(A)
deleted the addition and the Tribunal upheld the order of the CIT(A).

In appeal u/s. 260A of the Act, by the Revenue, the following
question was raised:

“Whether the ITAT was correct in law in deleting the
addition relating to employees’ contribution towards Provident Fund and ESI
made by the Assessing Officer u/s. 36(1)(va) of the Income-tax Act, 1961?”

 


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

“If the employees’ contribution is not deposited by the due
date prescribed under the relevant Acts and is deposited late, the employer
not only pays interest on delayed payment but can incur penalties also, for
which specific provisions are made in the Provident Fund Act as well as ESI
Act. Therefore, the Act permits the employer to make the deposit with some
delay, subject to the aforesaid consequences. In so far as the Income-tax Act
is concerned, the assessee can get the benefit if the actual payment is made
before the return is filed, as per the principles laid down by the Supreme
Court in CIT Vs. Vinay Cement Ltd., 213 CTR 268 (SC).”

 


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S. 133A : In absence of statement by client that its books of account are at premises of C.A., survey conducted in premises of C.A. and impounding books is invalid.

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65 Survey : Scope and validity : S. 133A of
Income-tax Act, 1961 : Survey of premises of C.A., lawyer, etc. in connection
with survey of client : In the absence of a statement by the client that its
books of account are kept at the premises of C.A., survey conducted in the
premises of the C.A.’s firm and impounding books, documents, etc. is invalid.


[U. K. Mahapatra & Co. v. ITO, 221 CTR 328 (Ori.)]

The petitioner is a firm of Chartered Accountants engaged in
the practice of accountancy involving auditing, consultancy, financing and other
services to their clients. A survey party conducted a survey at the premises of
the petitioner-firm and also impounded certain books of account and documents.

 

On writ petition challenging the validity of survey action,
the Orissa High Court allowed the petition and held as under :

“(i) The precondition for conducting survey u/s. 133A in
the premises of a Chartered Accountant, lawyer, tax practitioner in connection
with survey of the business place of their client is that the client in the
course of survey must state that his books of account/documents and records
are kept in the office of his Chartered Accountant/lawyer/tax practitioner.
Unless this precondition is fulfilled, the IT authority does not assume any
power to enter the business premises/office of the Chartered
Accountant/lawyer/tax practitioner to conduct survey u/s.133A in connection
with survey of the premises of their client.

(ii) There being no material to show that survey of
premises of firm of Chartered Accountants was undertaken consequent upon any
statement of its client that its books of account were kept in the premises of
the Chartered Accountants, survey conducted at the premises of Chartered
Accountant’s firm was without authority of law.”


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Assessment u/s.143(3) on basis of directions of CIT : Sub-sequent CIT exercising power u/s.263 : Not justified.

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64 Revision : S. 263 of Income-tax Act,
1961 : A.Ys. 1980-81 to 1986-87 : Assessment made u/s.143(3) on basis of
directions of CIT : Subsequent CIT exercising power u/s.263 : Not justified.


[Virendra Kumar Jhamb v. N. K. Vohra, 176 Taxman 11
(Bom.)]

The assessee was doing various types of construction work and
was not maintaining regular books of account. For the A.Ys. 1980-81 to 1986-87,
it approached the Deputy Director of Intelligence (Investigation) under the
Amnesty Scheme and offered the taxable income to be computed at the rate of 4%
of the total receipts. Finally, after discussing with the Deputy Director of
Intelligence and the Commissioner, it was mutually agreed upon that the assessee
would file revised returns for the relevant assessment years at the rate of 8%
of the gross receipts. This was confirmed by the second Commissioner by his
letter dated 30-11-1997. On the basis of the said letter of the Commissioner,
the Assessing Officer completed the assessment u/s. 143(3) of the Income-tax
Act, 1961 computing the income at the rate of 8% of the gross receipts.
Subsequently, third Commissioner issued notices u/s.263 seeking to revise the
assessment orders for the relevant years.

 

The assessee filed writ petition and challenged the notices.
The Bombay High Court allowed the writ petition, quashed the notices and held :

“(i) The Assessing Officer had passed revised assessment
orders based on the revised returns at 8%. The said orders were solely based
on the directive given by the earlier Commissioner and the same could not be
revised by the subsequent Commissioner exercising the power u/s.163.

(ii) Over and above, there was no error or anything
unsustainable in law. On the contrary, when the second Commissioner had
consistently taken the view that 8% would be a fair percentage, the third
Commissioner could not consider the same as ‘erroneous’ or unsustainable in
law. Therefore, the notices issued u/s. 163 as well as revised assessment
orders passed by the Commissioner were totally unsustainable in law for the
aforesaid reasons. Hence, all the notices issued u/s.263 as well as the
assessment orders passed by the Commissioner had to be quashed and set aside.”


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S. 147 and S. 148 : Change of opinion is not valid basis for reopening assessment

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62 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Y. 2003-04 : Change of opinion is not valid basis for
reopening assessment.


[Asteroids Trading and Investments P. Ltd. v. DCIT,
308 ITR 190 (Bom.)]

In the regular assessment u/s.143(3) of the Income-tax Act,
1961 for the A.Y. 2003-04, the AO had allowed the assessee’s claim for deduction
u/s.80M of the Act. Subsequently, a notice u/s.148 of the Act, dated 27-12-2006
was issued claiming that the income chargeable to tax has escaped assessment.
The objection filed by the assessee-company to the issue of notice was rejected.

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

“(i) The power conferred u/s.147 of the Income-tax Act,
1961, cannot be used like the power of review to reopen the assessment.
U/s.147 of the Act, assessments cannot be reopened on a mere change of
opinion.

(ii) The assessee-company had fully disclosed material
facts necessary for claiming deduction u/s.80M of the Act and there was
application of mind by the AO in allowing the deduction claimed by the
assessee in the assessment order. Though the notice u/s.148 was issued on the
ground that there was reason to believe that the income had escaped
assessment, there was neither any change of law, nor had any new material been
brought on record between the date of the assessment order and the date of
formation of opinion by the AO. It was merely a fresh application of mind by
the Officer to the same set of facts and the reassessment proceedings were
initiated based on the change of opinion of the Officer.”

 


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S. 147 and S. 148 : Change of opinion is not valid basis for reopening assessment.

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63 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Y. 2003-04 : Change of opinion is not valid basis for
reopening assessment.


[Asian Paints Ltd. v. DCIT, 308 ITR 195 (Bom.)]

For the A.Y. 2003-04, the assessee’s claim for deduction of
expenditure on wages, provident fund contribution, gratuity and superannuation
fund was allowed by the Assessing Officer after calling for details in respect
of the same. Subsequently a notice u/s.148 was issued on 27-12-2006 for
reopening the assessment. The assessee’s objection that the assessment cannot be
validly reopened merely on the basis of change of opinion was rejected.

 

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

“(i) When a regular order of assessment is passed in terms
of S. 143(3) of the Income-tax Act, 1961, a presumption can be raised that
such an order has been passed on application of mind. If non-application of
mind by the Assessing Officer in passing an order would itself confer
jurisdiction upon the Assessing Officer to reopen the proceeding without
anything further, it would amount to giving premium to an authority exercising
quasi-judicial function to take benefit of its own wrong. The Legislature has
not conferred power on the Assessing Officer to review its own order.

(ii) Initiation of reassessment proceedings would amount to
change of opinion of the Assessing Officer as it was merely a fresh
application of mind by the Assessing Officer to the same set of facts. Since
the Assessing Officer had failed to apply his mind to the relevant material
while framing the assessment order, he could not take advantage of his own
wrong and reopen the assessment u/s.147 of the Act.”

 


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S. 23 : Standard rent not fixed : Annual value determined on basis of actual rent received

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61 Income from house property : Annual
value : S. 23 of Income-tax Act, 1961 : Standard rent not fixed : Annual value
to be determined on the basis of actual rent received.


[CIT v. Sarabhai (P) Ltd., 176 Taxman 6 (Guj.)]

As per the rental agreement, the assessee-company had
received rental income of Rs.27,467 in the relevant year. The assessee-company
computed the house property income on the basis of the rent of Rs.27,467 so
received. The AO computed the house property income on the basis of the rental
value of Rs.1,36,508 fixed by the Small Causes Court and determined the annual
letting value of the property at Rs.1,57,675. The Tribunal deleted the addition.

 

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

“(i) As in the instant case, there was no fixation of
standard rent by any competent Court under the rent control legislation, the
same would not apply or if the standard rent was to be fixed as per the scheme
of the Rent Control Legislation, it might be required to be computed and
calculated. However, as per the language of the
relevant provisions of the Act, the higher amount is to be considered and it
was not a case of the Revenue, that the standard rent, if assessed as per the
rent control legislation, may exceed the
actual rental income received by the assessee; the income as assessed based on
the actual rental income was rightly approved by the Tribunal.

(ii) The Tribunal was right in setting aside the assessment
based on the annual rental value and was right in directing the assessment to
be made based on the actual rental income received by the assessee on the
basis of the rental agreement.”

 


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Purchase of goods by advance payment to seller : Interest earned on advance is business income eligible for deduction u/s.10B

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60 Exemption of income : S. 10B of
Income-tax Act, 1961 : A.Ys. 1993-94 and 1994-95 : Assessee purchasing goods by
making advance payment to seller: Interest earned on advance amount is business
income eligible for deduction u/s.10B.


[CIT v. Hycon India Ltd., 308 ITR 251 (Raj.)]

The assessee had made advance payment for purchase
of goods on which the assessee earned interest income. For the A.Y. 1993-94 the
AO granted exemption u/s.10B of the Income-tax Act, 1961, in respect of such
interest income also. Exercising the powers u/s.163, the Commissioner held that
the assessee is not entitled to exemption u/s.10B in respect of the interest
income. The Tribunal reversed the order of the Commissioner and held that the
interest income was the income from business. The same view was taken by the
Tribunal for the A.Y. 1994-95.

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

“(i) ‘Profits and gains of business or profession’ and
‘income from other sources’ are different
species of income. S. 2(24) of the Income-tax Act, 1961, does not categorise
separately, profits and gains of business or profession. The expression
‘profits and gains’ used in S. 2(24) is wider and is not confined to ‘profits
and gains of business or profession’. S. 10B provides for
exemption with respect to any ‘profits and gains’ derived by the assessee, and
is not confined to ‘profits and gains of business or profession’.

(ii) The interest income received by the assessee did fall
within the expression ‘profits and gains’ and was eligible for exemption as
business income u/s.10B.”


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Capital gains : Ss. 45, 48 and 55A : Computation : Full value of consideration is actual consideration : Market value has no relevance : Reference to Valuation Officer not valid.

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58 Capital gains : Computation : S. 45, S.
48 and S. 55A of Income-tax Act 1961 : A.Y. 1998-99 : Computation u/s.48 : Full
value of consideration is actual consideration : Market value has no relevance :
Reference to Valuation Officer u/s.55A not valid.


[CIT v. Smt. Nilofer I. Singh, 221 CTR 277 (Del.)]

In the previous year relevant to the A.Y. 1998-99 the
assessee had sold two properties for considerations of Rs.10,00,000 and
Rs.23,50,000, respectively. The AO referred the matter to the Valuation Officer
who valued the two properties at Rs.14,55,200 and Rs.53,73,000, respectively.
The AO computed the capital gain on the basis of the market value which resulted
in the addition of Rs.34,72,000. The Tribunal deleted the addition.

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

“(i) The expression ‘full value of the consideration’ used
in S. 48 does not have any reference to the market value, but only to the
consideration referred to in the sale deeds as the sale price of the assets
which have been transferred.

(ii) In the case of sale simplicitor where the full value
of consideration is the sale price of the asset transferred, there is no
necessity of computing fair market value. Hence, the Assessing Officer could
not have referred the matter to the Valuation Officer. The events under which
a reference u/s.55A can be made are like the ones occurring in S. 45(4) and S.
45(1A).”



Editor’ note : W.e.f. 2003-04, the provisions of S. 50C
would also need to be considered.

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Refund from excise duty is income derived from business eligible for deduction u/s.80-IB

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59 Deduction u/s.80-IB of Income-tax Act,
1961 : A.Y. 2000-01 : Refund from excise duty is income derived from business of
industrial undertaking eligible for deduction u/s. 80-IB.


[CIT v. Dharam Pal Prem Chand Ltd., 221 CTR 133
(Delhi)]

For the A.Y. 2000-01 the assessee’s claim for deduction
u/s.80-IB of the Income-tax Act, 1961 included refund of excise duty amounting
to Rs.2,61,92,386 in respect of the industrial unit in question. The Assessing
Officer disallowed the claim for deduction, holding that the refund received on
account of excise duty was not ‘income derived from any business of the
industrial undertaking’. The Tribunal allowed the assessee’s claim.

 

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

“(i) The assessee was granted exemption from payment of
excise duty under various Notifications. Modality of exemption was that the
assessee, in the first instance, had to pay excise duty on clearance of goods
and after verification by the excise authorities, refund was granted. In the
circumstances, the contention of the Revenue that refund of excise duty has no
direct nexus with the assessee’s industrial activity and that it was dependent
on Notification is not tenable.

(ii) Other contention of the Revenue that if deduction
u/s.80-IB was granted, the assessee would get double benefit, once as relief
u/s.80-IB and secondly, the assessee would pass on the excise duty paid to the
customers and recover in the form of sale price is equally untenable, as
firstly, no such claim was set up by the Revenue before any of the lower
authorities and secondly, goods manufactured by the assessee not being inputs
for any other goods, apprehension of the Revenue has no substance.”


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Interest on borrowed capital : Deduction u/s.36(1)(iii) of Income-tax Act, 1961 : A.Ys. 1986-87 to 1988-89 : Amount borrowed at 16% interest and invested in 4% non-cumulative preference shares : No evidence that transaction not genuine : No part of intere

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7 Interest on borrowed
capital : Deduction u/s.36(1)(iii) of Income-tax Act, 1961 : A.Ys. 1986-87 to
1988-89 : Amount borrowed at 16% interest and invested in 4% non-cumulative
preference shares : No evidence that transaction not genuine : No part of
interest could be disallowed.


[CIT v. Pankaj Munjal
Family Trust, 326 ITR 286 (P&H)]

For the A.Ys. 1986-87 to
1988-89, the assessee had claimed deduction of interest at the rate of 16%
borrowed for purchase of 4% non-cumulative preference shares. The Assessing
Officer restricted the allowance to 4% and disallowed the balance interest. The
Tribunal allowed the full claim.

In reference at the instance
of the Revenue, the following question of law was raised :

“Whether, on the facts and
in the circumstances of the case, the Appellate Tribunal was right in law in
allowing interest as claimed by the assessee at a higher rate on borrowings to
the nominal fixed return on investments made in purchase of shares out of such
borrowings from family concerns ?”

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

“(i) It is not the case of
the Revenue that the assessee had not paid interest to the lender. Merely
because the assessee had invested the borrowed amount for the purchase of 4%
non-cumulative preference shares, it could not be presumed that the
transaction was colourable. The Revenue had not brought on record any evidence
to show that the interest paid by the assessee on the borrowed amount was
highly exorbitant and no such interest rate was ever prevalent in the market.

(ii) Therefore, the
Tribunal was right in law in allowing interest as claimed by the assessee.”

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Bad debts: S. 36(1)(vii), (2) of I. T. Act, 1961: A. Y. 2001-02: Assessee share broker purchasing shares for clients and paying money: Money not recoverable from client: Deduction allowable as bad debt:

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Reported:

 

42 Bad debts: S. 36(1)(vii), (2) of I. T. Act, 1961: A. Y.
2001-02: Assessee share broker purchasing shares for clients and paying money:
Money not recoverable from client: Deduction allowable as bad debt:

CIT vs. Bonanza Portfolio Ltd.; 320 ITR 178 (Del):

The assessee was in the business of share broking. In the
course of its business, the assessee purchased shares on behalf of its clients
and paid the purchase money. The brokerage received by the assessee was shown as
income in its books of account of the immediate previous year. Since the balance
amount of Rs. 50,30,491/- could not be recovered from the client, the assessee
wrote-off the amount as bad debt. The assessee claimed the deduction of the said
amount as bad debt. The Assessing Officer disallowed the claim on the ground
that the conditions for allowing the amount as bad debt, as stipulated in
section 36(1)(vii) and read with sub-section (2), were not satisfied. The
Tribunal held that the conditions are satisfied and allowed the claim.

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

“i) The money receivable from the client had to be treated
as bad, and since it became bad, it was rightly considered as bad debt and
claimed as such by the assessee in the books of account.

ii) Since the brokerage payable by the client was a part of
the debt and that debt had been taken into account in the computation of the
income, the conditions stipulated in section 36(1)(vii) and (2) stood
satisfied.”

 


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Export profit : Deduction u/s.80HHC r/w S. 10A of Income-tax Act, 1961 : A.Y. 2003-04 : Assessee is entitled to deduction u/s.80HHC for remaining 10% of profit, which was to suffer tax after applying S. 10A/10B.

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Reported :

26. Export profit :
Deduction u/s.80HHC r/w S. 10A of Income-tax Act, 1961 : A.Y. 2003-04 : Assessee
is entitled to deduction u/s.80HHC for remaining 10% of profit, which was to
suffer tax after applying S. 10A/10B.

[CIT v. Ambatturre
Clothing Ltd., 194 Taxman 79 (Mad.)]

The assessee, an export
concern was entitled to deduction u/s.10A/10B and u/s.80HHC of the Income-tax
Act, 1961. For the A.Y. 2003-04 the assessee had claimed deduction u/s.10A/10B
of the Act and the same was allowed. The assessee had also claimed deduction
u/s.80HHC for the remaining 10% of the profit, which to suffer tax after
applying S. 10A/10B. The claim was allowed by the Assessing Officer.
Subsequently, the Assessing Officer rectified the assessment order u/s.154 and
withdrew the deduction allowed u/s.80HHC, holding that it amounted to double
deduction. The Tribunal cancelled the rectification order.

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

“(i) According to the
Assessing Authority, such a claim made u/s.80HHC in respect of the remaining
10% of the profits amounted to a claim of double deduction, which was not
permissible. On the said basis, the Assessing Authority took the view that the
said issue was an apparent mistake on the face of the record, which he
rectified by passing his order dated 11-6-2007.

(ii) When we examine the
issue raised in this appeal, at the very outset, it will have to be pointed
out that even u/s.10A(6)(iii) of the Act, there is a specific
provision, which reads as under :

“No deduction shall be
allowed u/s.80HH or u/s.80HHA or u/s.80-I or u/s.80-IA or u/s.80-IB in
relation to the profits and gains of the undertaking; “

(iii) The very statutory
provision prescribing a prohibition in respect of the deductions in relation
to the profits and gains itself, has not specifically included S. 80HHC.
Apparently, it therefore would only mean that there was no prohibition for
claiming any deduction u/s. 80HHC while applying the benefits provided u/s.10A
of the Act. If that is the statutory prescription, by which the assessee was
entitled to claim a benefit u/s.80HHC in relation to the profits and gains
while invoking S. 10A, it will have to be concluded that the assessment order
in having allowed such a deduction of the remaining 10% of the profits earned
by the assessee, was not erroneous.

(iv) In any event, having
regard to such a statutory prescription available for the assessee to claim
the benefit u/s.80HHC in respect of the profits earned from S. 10A of the Act,
there is absolutely no scope for the Assessing Authority to have invoked S.
154 of the Act, in order to state that, that can be considered as an error
apparent, inasmuch as there was no error at all, much less, apparent error to
be rectified by the Assessing Authority.

(v) This conclusion of
ours is apart from the conclusion of the Tribunal in having held that in that
situation what was held by the Assessing Authority in the original assessment
order was a possible view and that cannot be considered as an error apparent
on the face of the records.”

 


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Search and seizure : Block assessment : S. 158BD of Income-tax Act, 1961 : Documents seized considered for assessment of third person : Notice could not be issued on assessee u/s.158BD.

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Reported :


53 Search and seizure :
Block assessment : S. 158BD of Income-tax Act, 1961 : Documents seized
considered for assessment of third person : Notice could not be issued on
assessee u/s.158BD.

[Superhouse Overseas Ltd.
and Anr. v. Dy. CIT, 325 ITR 448 (All.)]

Search and seizure operation
u/s.132 of the Income-tax Act, 1961 was carried out at the residence of one T. A
diary was seized and proceedings u/s.158BC were initiated in the case of T.
Notices u/s.158BD were issued in the name of the petitioners.

The petitioners filed writ
petitions before the Allahabad High Court and challenged the notices. The
petitioners pointed out to the Court that the material on the basis of which the
notices u/s. 158BD were issued, had been considered by the Settlement Commission
in the case of E, an association of persons and the Settlement Commission had
passed an order u/s.245D(4) of the Act in which on the basis of the diary,
income had been determined and that in pursuance of the order of the Settlement
Commission, the association of persons had duly deposited the tax.

The Allahabad High Court
allowed the writ petitions and held as under :

“Once the diary which was
the basis for the issue of the notices u/s.158BD had been considered in the case
of the association of persons and the income arising thereof had been assessed
in the case of the association of persons, the notices u/s.158BD did not survive
and were liable to be quashed.”

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Revision : S. 263 of Income-tax Act, 1961 Limitation : A.Y. 2004-05 : Reopening of assessment on certain items and reassessment completed : Revision in respect of other items u/s.263 : Period of limitation to be counted from the original assessment.

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Reported :

52 Revision : S. 263 of
Income-tax Act, 1961 Limitation : A.Y. 2004-05 : Reopening of assessment on
certain items and reassessment completed : Revision in respect of other items
u/s.263 : Period of limitation to be counted from the original assessment.

[Ashoka Buildcom Ltd. v.
ACIT, 191 Taxman 29 (Bom.)]

For the A.Y. 2004-05 the
original assessment was completed u/s.143(3) of the Income-tax Act, 1961 by an
order dated 27-12-2006. Subsequently the assessment was reopened by issuing a
notice u/s. 148, dated 6-3-2007 on the basis that the benefit u/s.72A had been
wrongly allowed to the assessee. Reassessment was completed by an order u/s.147
dated 27-12-2007 withdrawing the benefit given to the assessee u/s.72A of the
Act. Thereafter, on 30-4-2009 the Commissioner issued notice u/s.263 proposing
to revise the assessment order dated 27-12-2007.

The assessee filed writ
petition and challenged the notice on the ground that what is sought to be
revised is the original assessment order dated 27-12-2006 and not the
reassessment order dated 27-12-2007 and accordingly the notice u/s.263, dated
30-4-2009 is beyond the period of limitation and hence invalid. The Bombay High
Court allowed the petition, quashed the notice and held as under :


“(i) While seeking to
exercise his jurisdiction u/s. 263, the Commissioner did not find any error
in the order of reassessment dated 27-12-2007 as regards the disallowance of
the assessee’s claim on the basis of the provisions of S. 72A. The impugned
notice adverted to issues which, as a matter of fact, did not form either
the subject-matter of the notice that was issued u/s.148 on 6-3-2007, nor
the order of reassessment thereupon which was passed on
27-12-2007. The jurisdiction u/s.263 was sought to be exercised with
reference to issues which were unrelated to the grounds on which the
original assessment was reopened and reassessment was made.

(ii) Ss.(2) of S. 263
stipulates that no order shall be made U/ss.(1) after the expiry of two
years from the end of the financial year in which the order sought to be
revised was passed. That period of two years from the end of the financial
year in which the original order of assessment dated 27-12-2006 was passed,
had expired on 31-3-2009. Hence, the exercise of the revisional jurisdiction
in respect of the original order of reassessment was barred by limitation.

(iii)
Where an assessment has been reopened u/s. 147 in relation to a particular
ground or in relation to certain specified grounds and subsequent to the
passing of the order of reassessment, the jurisdiction u/s.263 is sought to
be exercised with reference to issues which did not form the subject of the
reopening of the assessment or the order of reassessment, the period of
limitation provided for in Ss.(2) of S. 263 would commence from the date of
the order of assessment and not from the date on which the order reopening
the
reassessment has been passed.

(iv) The submission of
the Revenue was that when several issues are dealt with in the original
order of assessment and only one or more of them are dealt with in the order
of reassessment passed after the assessment has been reopened, the remaining
issues must be deemed to have been dealt with in the order of reassessment.
Hence, it had been urged that the omission of the Assessing Officer, while
making an order of reassessment, to deal with those issues u/s. 143(3), read
with S. 147, constituted an error which could be revised in exercise of the
jurisdiction u/s.263. The submission could neither be accepted as a matter
of first principle, based on a plain reading of the provisions of S. 147 and
S. 263, nor was it sustainable in view of the law laid down by the Supreme
Court.

(v) For those reasons,
the exercise of the revisional jurisdiction u/s.263 was barred by
limitation.”



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Reassessment : S. 147 and S. 148 of Income-tax Act, 1961 : A.Y. 1998-99 : AO issuing notice u/s.148 on basis of information given by Dy. Director and directions from Dy. Director and Addl Commissioner : AO not applying his mind : Notice and reassessment p

New Page 2

Reported :

50 Reassessment : S. 147 and
S. 148 of Income-tax Act, 1961 : A.Y. 1998-99 : AO issuing notice u/s.148 on
basis of information given by Dy. Director and directions from Dy. Director and
Addl Commissioner : AO not applying his mind : Notice and reassessment
proceedings not valid.

[CIT v. SFIL Stock
Broking Ltd., 325 ITR 2852 (Del.)]

For the A.Y. 1998-99, the
return of income filed by the assessee was processed u/s.143(1) of the
Income-tax Act, 1961. Subsequently, on the basis of the information given by the
DDIT (Investigation) that the assessee was allegedly the beneficiary of a bogus
claim of long-term capital gain, the Assessing Officer issued notice u/s.148 of
the Act and made an addition of Rs.20,70,000 in the reassessment proceedings.
The Tribunal quashed the reassessment proceedings holding it to be illegal.

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


“(i) The first sentence
of the reasons recorded by the Assessing Officer was mere information
received from the DDIT (Investigation). The second sentence was a direction
given by the same Deputy Director to issue a notice u/s.148. The third
sentence again comprised a direction given by the Additional Commissioner to
initiate proceedings u/s.148 in respect of cases pertaining to the relevant
ward.

(ii) The Assessing
Officer referred to the information and the two directions as reasons on the
basis of which he was proceeding to issue notice u/s.148.

(iii) These could not be
the reasons for proceeding u/s.147/148 of the Act. As the first part was
only an information and the second and the third parts of the reasons were
mere directions, it was not at all discernible as to whether the Assessing
Officer had applied his mind to the information and independently arrived at
a belief that, on the basis of the material which he had before him, income
had escaped assessment.

(iv) There was no
substantial question of law for consideration.”



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Rectification : S. 154 of Income-tax Act, 1961 : Interest u/s.234B not levied in assessment order relying on decision of Supreme Court : Subsequent retrospective amendment : Order not erroneous : Rectification not valid.

New Page 2

Reported :


51 Rectification : S. 154 of
Income-tax Act, 1961 : Interest u/s.234B not levied in assessment order relying
on decision of Supreme Court : Subsequent retrospective amendment : Order not
erroneous : Rectification not valid.

[Shriram Chits
(Bangalore) Ltd. v. JCIT, 325 ITR 219 (Karn.)]

For the A.Y. 1998-99, the
assessment was completed u/s.143(3) of the Act. Following the judgment of the
Supreme Court in CIT v. Ranchi Club Ltd.; 247 ITR 209 (SC) interest was
not levied u/s. 234B of the Act. Subsequently, in view of the subsequent
retrospective amendment to S. 234B by the Finance Act, 2001 the Assessing
Officer rectified the assessment order u/s.154 of the Act and levied interest
u/s.234B of the Act. The Tribunal upheld the order of rectification.

The Karnataka High Court
allowed the appeal filed by the assessee and held as under :


“(i) In view of the
judgment of the Supreme Court in CIT v. Max India Ltd.; 295 ITR 282,
it was not possible for the Assessing Officer to reopen the case since the
Assessing Officer had rightly passed the order relying upon the judgment of
CIT v. Ranchi Club Ltd.; 247 ITR 209 (SC) while passing the order of
assessment.

(ii) Just because there
was a subsequent amendment, the Assessing Officer could not reopen the file.
The order of rectification was not valid.”



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Loss return : Delay in filing : Condonation of delay : S. 119(2) of Income-tax Act, 1961 : A.Y. 2004-05 : CBDT has power to condone the delay.

New Page 2

Reported :


49 Loss return : Delay in
filing : Condonation of delay : S. 119(2) of Income-tax Act, 1961 : A.Y. 2004-05
: CBDT has power to condone the delay.

[Lodhi Properties Co.
Ltd. v. Dept. of Revenue, 191 Taxman 74 (Del.)]

For the A.Y. 2004-05 the
assessee had filed return loss seeking carry forward of loss. The last date for
filing was 1-11-2004. The assessee’s representative reached the Central Revenue
building at around 5.15 p.m. on 1-11-2004. He was sent from one room to the
other and by the time he reached the room where his return was to be accepted,
it was already 6.00 p.m., when he was told that the return would not be accepted
because the counter had been closed. In such circumstance the return was filed
on the next day, i.e., on 2-11-2004. The assessee filed an application
u/s.119(2) of the Income-tax Act, 1961 to the CBDT for condonation of delay of
one day.

On a writ petition filed by
the assessee challenging the order of rejection, the Revenue contended that
since it was a case of a loss return, there was no provision under the law for
condoning the delay and that S. 119(2)(b) does not apply to such a case.

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


“(i) The CBDT has the
power u/s.119(2) to condone the delay in the case of a return which is filed
late and where a claim for carry forward of losses is made.

(ii) In the instant
case, the impugned order u/s. 119 passed by the CBDT was a non-speaking one.
Normally, the matter would have been remanded to the CBDT to consider the
application of the assessee afresh. However, in the instant case, the delay
was only of one day and the circumstances had been explained and had not
been controverted by the respondents. A sufficient cause had been shown by
the assessee for the delay of one day in filing the return. If the delay was
not condoned, it would cause genuine hardship to the assessee. Thus, in the
circumstances of the case, instead of remanding the matter to the CBDT, the
delay of one day in filing of the return was to be directed to be condoned.”



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Capital gains : Transfer : A.Y. 1993-94 : Renunciation of right to subscribe to rights shares : Short-term capital loss : Renunciation in favour of general public : Does not amount to transfer : Loss notional : Not deductible.

New Page 2

Reported :

48. Capital gains : Transfer
: A.Y. 1993-94 : Renunciation of right to subscribe to rights shares :
Short-term capital loss : Renunciation in favour of general public : Does not
amount to transfer : Loss notional : Not deductible.

[CIT v. United Breweries
Ltd., 325 ITR 485 (Kar.)]

As a holding company of a
company M, the assessee had the right to subscribe to 61,26,394 rights shares in
M. The assessee subscribed only to 22,75,650 shares and renounced the right to
subscribe 1,54,100 shares for a consideration of Rs.22,84,000. As a result the
right to subscribe to the balance 38,50,744 rights shares was lost. The assessee
claimed that before the rights issue of shares, the market quotation of shares
in M was Rs.80 per share and after the rights issue was completed the market
price came down to Rs.70 per share. The assessee therefore contended that on
account of this diminution in the value of shares by Rs.10 per share the
assessee incurred a loss to right to subscribe to 38,50,744 shares at the rate
of Rs.10 per share and that the total net loss was Rs.3,62,23,440. The Assessing
Officer rejected the claim of the assessee. The Tribunal allowed the assessee’s
claim.

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


“(i) There was no
transfer of the rights in the rights shares in question by the transferor to
the transferee. In other words, the rights were renounced by the assessee in
favour of unknown persons and that too for ‘nil consideration’. Though the
transferor was the assessee, the act of transfer was not complete inasmuch
as there was no transfer in favour of the transferee. Transfer in favour of
an unknown person could not be a transfer.

(ii) When a share can be
sold at a profit either in the open market or at the face value at Rs.10,
there was no question of suffering of loss in the facts of the case. The
loss was only notional. As there was no transfer by way of renunciation, the
question of allowing capital loss in respect of notional loss would not
arise.”



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Bad debts : S. 36(1)(vii) of Income-tax Act, 1961 : No evidence that amount not taken into account in computing income of prior years : Bad debt allowable as deduction.

New Page 2

Reported :

47. Bad debts : S.
36(1)(vii) of Income-tax Act, 1961 : No evidence that amount not taken into
account in computing income of prior years : Bad debt allowable as deduction.

[CIT v. Dwarika
Industrial Development and Chains (P) Ltd., 325 ITR 211 (All.)]

In the relevant year, a sum
of Rs.6,27,735 was lying under the head ‘sundry debtors’, which the company was
not able to realise as this money was due and payable by one NB. The assessee
had sent several letters directing the debtor to pay the amount, but the debtor
did not even acknowledge the same. The assessee therefore, wrote off the said
amount as bad debt and claimed deduction u/s.36(1)(vii) of the Income-tax Act,
1961. The Assessing Officer disallowed the claim on the ground that the
conditions for allowance of the bad debt as provided u/s.36(2)(i) have not been
clearly brought out. The Commissioner (Appeals) allowed the assessee’s claim on
the ground that the Assessing Officer has not pointed out that this debt has not
been taken into account in computing the income in any earlier or previous year.
The Tribunal upheld the decision of the Commissioner (Appeals).

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


“(i) It was the specific
case of the assessee that the amount represented the sales effected to NB,
but because of the fact that there was no documentary evidence in support of
the claim as also the acknowledgement of the letters, the said amount was
written off. The Assessing Officer did not make any comment on this issue
and instead proceeded on the ground by simply saying that merely because the
amount has become bad the assessee cannot claim to reduce the income and
placed reliance on S. 36(2)(i) of the Act.

(ii) In our opinion, the
Commissioner (Appeals) had rightly observed that the Assessing Authority did
not find any material on record to show that the said amount has not been
taken into account in computing the income of any previous years.

(iii) That being the
position, in our considered opinion, the Tribunal had rightly upheld the
deletion.”



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Income deemed to accrue or arise in India : S. 9 of Income-tax Act, 1961 r/w Article 15 of DTAA between India and UK : A.Y. 1996-97 : Assessee non-resident rendering services in India : Assessee liable to be taxed in India only for that part of income att

New Page 1

 7 Income deemed to accrue or arise in India :
S. 9 of Income-tax
Act, 1961 r/w Article 15
of DTAA between India
and UK : A.Y. 1996-97 : Assessee non-resident rendering services in India :
Assessee liable to be taxed in India only for that part of income attributable
to services rendered by it in India and utilised in India.

[Clifford Chance v. Dy. CIT, 176 Taxman
458 (Bom.)]

The assessee was an international firm of
solicitors resident in the United Kingdom. It had no office or fixed base in
India. During the A.Y. 1996-97, it was appointed as the English law legal
adviser for four projects in India. Its partners were in India for more than
90 days. It filed its return of income showing income attributable to its
operations in India in respect of the said four projects. However, the
Assessing Officer held that the entire fees received by the assessee from the
four projects, whether services were rendered in India or outside India, was
taxable in India. The Tribunal upheld that view.

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

“(i) The territorial nexus doctrine plays an
important part in the assessment of tax. Tax is levied on one transaction
where the operations, which may give rise to income, may take place partly in
one territory and partly in another territory. Income arising out of
operations in more than one jurisdiction would have territorial nexus with
each of the jurisdiction on actual basis. If that be so, it may not be correct
to contend that the entire income ‘accrues or arises’ in each of the
jurisdiction.

(ii) In the case of Ishikawajima Harima Heavy
Industries Ltd. v. DIT, (2007) 288 ITR 408, the Supreme Court, while
interpreting the provisions of S. 9(1)(vii)(c), has observed that it requires
two conditions to be met — the services which are the source of the income
that is sought to be taxed, have to be rendered in India, as well as utilised
in India, to be taxable in India. Both the above conditions have to be
satisfied simultaneously. Thus, for a non-resident to be taxed on income for
services, such a service needs to be rendered within India and has to be part
of a business or profession carried out by such person in India.

(iii) As per the judgment of the Supreme Court,
territorial nexus for the purpose of determining the tax liability is an
internationally accepted principle. An endeavor should, thus, be made to
construe the taxability of a non-resident in respect of income derived by it.
Having regard to the internationally accepted principle and the DTAA, no
extended meaning can be given to the words ‘income deemed to arise in India’
as expressed in S. 9 which incorporates various heads of income on which tax
is sought to be levied by the Republic of India. Whatever is payable by a
resident to a non-resident by way of fees for services, thus, would not always
come within the purview of S. 9(1)(vii). It must have sufficient territorial
nexus with India so as to furnish a basis for imposition of tax. Whereas a
resident would come within the purview of S. 9(1)(vii), a non-resident would
not, as services of a non-resident to a resident utilised in India may not
have much relevance in determining whether the income of a nonresident accrues
or arises in India. It must have a direct link with the services rendered in
India. When such a link is established, the same may again be subjected to any
relief under the DTAA. A distinction may also be made between rendition of
service and utilisation
thereof.


(iv)
The above
understanding of the law laid down by the Apex Court and S. 9(1)(vii)(c),
read in its plain language, envisage the fulfillment of two conditions:
services, which are source of income sought to be taxed in India, must
be (i) utilised in India; and (ii) rendered in India. In the instant
case, both those conditions had not been satisfied simultaneously.

(v)
In the above view of
the matter, contentions raised by the assessee were to be accepted. Thus the
income of the assessee charged on hourly basis in India and utilised in
India would only be chargeable to income-tax as disclosed in the return of
income.”

 

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Disallowance of expenditure : S. 14A of Income-tax Act, 1961 : Ss.(2) and Ss.(3) of S. 14A are constitutionally valid : They apply w.e.f. A.Y. 2007-08 : Rule 8D is not ultra vires S. 14A : It applies w.e.f. A.Y. 2008-09.

New Page 2

Unreported :


46 Disallowance of
expenditure : S. 14A of Income-tax Act, 1961 : Ss.(2) and Ss.(3) of S. 14A are
constitutionally valid : They apply w.e.f. A.Y. 2007-08 : Rule 8D is not

ultra vires
S. 14A : It applies w.e.f. A.Y. 2008-09.


[Godrej & Boyce v. DCIT (Bom.),
WP No. 758 of 2010 dated 12-8-2010]

In the writ petition
challenging the validity of S. 14A and Rule 8D, the Bombay High Court has held
as under :


“(i) S. 14A supersedes
the principle of law that in the case of a composite business, expenditure
incurred towards tax-free income could not be disallowed and incorporates an
implicit theory of apportionment of expenditure between taxable and
non-taxable income. Once a proximate cause for disallowance is established,
which is the relationship of the expenditure with income which does not form
part of the total income, a disallowance u/s.14A has to be effected.

(ii) The test which has
been enunciated in Walfort for attracting the provisions of S. 14A is that
“there has to be a proximate cause for disallowance which is its
relationship with the tax exempt income”. Once the test of proximate cause,
based on the relationship of the expenditure with tax exempt income is
established, a disallowance would have to be effected u/s.14A.

(iii) The provisions of
Ss.(2) and Ss.(3) of S. 14A are constitutionally valid. Ss.(2) and Ss.(3) of
S. 14A are not retrospective. They apply w.e.f. 1-4-2007 i.e., from
A.Y. 2007-08.

(iv) In the affidavit in
reply that has been filed on behalf of the Revenue an explanation has been
provided for the rationale underlying Rule 8D. In the written submissions
which have been filed by the Additional Solicitor General it has been
stated, with reference to Rule 8D(2)(ii) that since funds are fungible, it
would be difficult to allocate the actual quantum of borrowed funds that
have been used for making tax-free investments. It is only the interest on
borrowed funds that would be apportioned and the amount of expenditure by
way of interest that will be taken (as ‘A’ in the formula) will exclude any
expenditure by way of interest which is directly attributable to any
particular income or receipt (for example, any aspect of the assessee’s
business such as plant/machinery, etc.).

(v) Rule 8D is not
ultra vires the provisions of S. 14A. The Assessing Officer cannot
ipso facto apply Rule 8D, but can do so only where he records
satisfaction on an objective basis that the assessee is unable to establish
the correctness of its claim.

(vi) Rule 8D is
prospective and applies w.e.f. A.Y. 2008-09. For prior years the Assessing
Officer has to enforce the provisions of S. 14A(1).

(vii) U/s.14A(1), it is
for the Assessing Officer to determine as to whether the assessee had
incurred any expenditure in relation to the earning of income which does not
form part of the total income. The Assessing Officer would have to arrive at
his determination after providing an opportunity to the assessee to furnish
its accounts and to place on record all relevant material in support of the
circumstances which are considered to be relevant and germane.

(viii) The argument that
dividend on shares/units is not tax-free in view of the dividend
distribution tax paid by the payer u/s.115-O is not acceptable, because such
tax is not paid on behalf of the shareholder, but is paid in
respect of the payer’s own liability.”



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Income : S. 2(24) of Income-tax Act, 1961 : A.Ys. 1987-88 and 1988-89 : Refund collected by producing bogus TDS certificates is income taxable under residuary head.

New Page 1

 6 Income : S.
2(24) of Income-tax Act, 1961 :
A.Ys. 1987-88 and
1988-89 : Refund collected by producing bogus TDS certificates is income
taxable under residuary head.

[CIT v. K. Thangamani, 309 ITR 15 (Mad.)]

The assessee was engaged in tax consultancy and
audit work. For the A.Ys. 1987-88 and 1988-89 the Assessing Officer assessed
the refunds received by the assessee on the basis of bogus TDS certificates as
income from other sources. The Tribunal deleted the addition holding that the
amount of refunds received by the assessee by fraudulent means could not be
assessed as income of the assessee.

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

“(i) The expression ‘income’ in S. 2(24) of the
Income-tax Act, 1961 is wide and the object of the Act being to tax income it
has to be given an extended meaning. Any kind of income earned by the assessee
attracts income-tax at the point of earning and tax law is not concerned with
the ultimate event how the income is expended. The Act makes an obligation to
pay tax on all income received. The Act considers income earned legally as
well as tainted income alike.

(ii) When the Tribunal found that the assessee
had indulged in fabricating TDS certificates and got refunds from the
Department, it should not have come to the conclusion that such income was not
taxable. There is a clear factual finding recorded by the Assessing Officer as
well as the Commissioner (Appeals) to the effect that the assessee had
indulged in filing bogus TDS certificates and got refund of the amount from
the Department. It was also the admitted case of the assessee before the
Department as well as the Central Bureau of Investigation during the course of
investigation into the offence that he had indulged in the act of fabricating
TDS certificates and collecting refunds from the Department.”

 

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Educational institution : Exemption u/s. 5 10(23C)(vi) of Income-tax Act, 1961 : Application filed after prescribed time : No statutory bar for condonation : Application for condonation of delay should be considered.

New Page 1

 5 Educational institution : Exemption u/s.
5 10(23C)(vi) of
Income-tax Act, 1961 : Application filed after prescribed time : No statutory
bar for condonation : Application for condonation of delay should be
considered.



[Padmashree Krutarth Acharya Institute of
Engineering and Technology v. Chief CIT, 309 ITR 13 (Ori.)]

The assessee is an educational institution
eligible for exemption u/s.10(23C)(vi) of the Income-tax Act, 1961. It filed
an application for grant of approval for exemption u/s.10(23C)(vi) of the Act.
The Chief Commissioner rejected the application on the ground that the
application was filed beyond time and the proviso added to S. 10(23C)(vi) did
not empower him to condone the delay.

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

“(i) The Commissioner while deciding the rights
of the parties acts in a quasi-judicial capacity and has to decide the rights
after a hearing. Any authority exercising such quasi-judicial functions should
also have incidental power of condoning delay if there was a justifiable
ground for such condonation. There is no clear statutory bar precluding such
condonation.

(ii) The Commissioner was to decide the
application for condonmation of delay on the merits and then consider the
application for exemption on the merits.”

 


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Busness expenditure : S. 37(1) of Income-tax Act, 1961 : Textile business : Closure of one unit : Retrenchment compensation, interest, PF to employees, legal expenses and reimbursement of loss to PF trust on sale of securities is allowable business expend

New Page 1

 3 Busness expenditure : S. 37(1) of Income-tax
Act, 1961 : Textile business : Closure of one unit : Retrenchment
compensation, interest, PF to employees, legal expenses and reimbursement of
loss to PF trust on sale of securities is allowable business expenditure.

[CIT v. DCM Ltd., 221 CTR 513 (Del.)]

The assessee was in the business of textile
manufacturing. It closed one of its manufacturing units out of four units. It
paid Rs.8,71,20,781 by way of retrenchment compensation. It had incurred an
expenditure of Rs.1,86,69,703 by way of interest on monies borrowed for the
purpose of payment of retrenchment compensation and PF to the employees of the
closed unit. It had also incurred an expenditure of Rs.3,57,700 as legal
expenses on account of the closure of the unit. The Assessing Officer
disallowed the claim for deduction of the these expenses.

On termination of services of the employees of
the closed unit when the PF dues were required to be paid, the employees PF
trust approached the RPF Commissioner to obtain approval for sale of
Government securities, in order to make payment to the employees. The RPF
Commissioner granted the permission with a caveat that in the event of any
deficiency on sale of securities the burden would have to be borne by the
assessee, in order to assure that the employees would get the rate of interest
equivalent to the rate paid by the Central Government. The loss so incurred by
the employees PF trust was Rs.1,80,20,261 and the same was reimbursed by the
assessee to the trust. The assessee’s claim for deduction of the said
expenditure was rejected by the Assessing Officer relying on the provisions of
S. 14A of the Act. The Tribunal allowed the assessee’s claims.

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

“(i) As found by the Tribunal there was no
closure of business since DCM mill unit was only a part of the textile
manufacturing operations, which continued even after the closure of the DCM
mill unit as the assessee continued in the business of manufacture of textiles
in the three remaining units. It is specifically noted that the assessee
prepared a consolidated P & L a/c and balance sheet of all its manufacturing
units taken together. The control and management of the assessee was
centralised in the head office, and also, the fact that all important policy
decisions were taken at the head office. The Tribunal came to the conclusion
that there was interconnection, interlacing and unity of control and
management, common decision-making mechanism and use of common funds in
respect of all four units. It repelled the arguments of the Revenue for
consideration that the DCM mill unit was a separate business and hence with
the closure of the DCM mill unit, the assessee ought not to be allowed
deduction of the expenses, based on the fact that in respect of the DCM mill
unit the assessee maintained separate books of account and engaged separate
workers. In view of the finding of fact returned by the Tribunal, no fault can
be found with the
reasoning of the Tribunal.

(ii) Expenditure incurred by the assessee company
to make up the deficiency arising on sale of securities by the employees PF
trust in order to ensure that its employees are paid a rate of interest
equivalent to that paid by the Central Government was an expenditure incurred
by the assessee towards its employees and, therefore, provisions of S. 14A
were not applicable.”

 

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Business expenditure : Bonus : S. 36(1)(ii) of Income-tax Act, 1961 : A.Y. 1985-86 : Customary bonus over and above payable under the Bonus Act : Paid for last 10 years as a practice : Eligible for deduction u/s.36(1)(ii) second proviso.

New Page 1

 4 Business expenditure : Bonus : S. 36(1)(ii)
of Income-tax Act, 1961 : A.Y. 1985-86 : Customary bonus over and above
payable under the Bonus Act : Paid for last 10 years as a practice : Eligible
for deduction u/s.36(1)(ii) second proviso.

[CIT v. Sesa Goa Ltd., 221 CTR 590 (Bom.)]

As a general practice in the business, the
assessee had paid an amount of Rs.18,73,192 by way of bonus to the employees
over and above the statutory bonus prescribed under the Bonus Act and claimed
the deduction. The Assessing Officer disallowed the claim for deduction
holding that it is not permissible u/s.36 of the Income-tax Act, 1961. The
Tribunal allowed the claim.

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

“(i) It is true that wherever a bonus is paid to
an employee in excess or otherwise than what is required to be paid under the
Bonus Act, such a payment is not entitled for deduction automatically, but the
assessee has to satisfy all the three ingredients, namely, the pay of the
employee and the condition of his service; the profits of the business or
profession for the previous year in question; and the general practice in
similar business and profession. The determination of these conditions should
lead to bonus being reasonable, and therefore, entitled to deduction in terms
of second proviso to S. 36(1)(ii).

(ii) In the present case, the assessee had been
paying bonus for the last 10 years otherwise in excess of the Bonus Act and
this had become a practice and the CIT(A) as well as the Tribunal have
recorded the finding that such bonus was payable as a general practice
followed in similar business or profession. The finding in question being a
primary question of fact, there is no reason to interfere with the impugned
order.”

 


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Appellate Tribunal : A.Y. 2001-02 : Order passed beyond four months after hearing and without giving reasons : Quashed as not valid.

New Page 1

 2  Appellate Tribunal : A.Y. 2001-02 : Order passed
beyond four months after hearing and without giving reasons : Quashed as

not valid.


[Shivsagar Veg Restaurant, 176 Taxman 260 (Bom.)]

For the A.Y. 2001-02 the Tribunal had heard the
assessee’s appeal on 2-6-2005, but the order was passed on 21-10-2005 i.e.,
almost after a delay of more than four months dismissing the appeal without
recording reasons, discussing propositions of law and case law relied upon by
the assessee.

On appeal filed by the assessee the Bombay High
Court set aside the order of the Tribunal for fresh disposal and held as under :

“(i) The Appellate Tribunal being the final author-ity
of facts, it is incumbent upon it to appreciate the evidence, consider the
reasons of the authorities below and assign its own reasons as to why it
disagrees with the reasons and findings of the authorities below. Merely because
the Tribunal happened to be an appellate authority, it does not get the right to
brush aside reasons or findings recorded by the first authority or the lower
appellate authority. It has to examine validity of the reasons given and
findings recorded. Mere recording that the conclusions arrived at did not
require discussion of the case law and other propositions of law is no
consideration. Merely by saying that the findings of the Commissioner (Appeals)
are just, fair and in accordance with the law can hardly tantamount to giving
reasons. The absence of reasons had rendered the impugned order of the Tribunal
unsustainable.

 

(ii) The basic rule of natural justice requires
recording of reasons in support of the order. The order has to be
self-explanatory and should not keep the Higher Court guessing for reasons.
Reasons provide live link between conclusion and evidence and that vital link
is a safeguard against arbitrariness, passion and prejudice.

(iii) Reason is a manifestation of mind of
adjudicator. It is a tool for judging the validity of the order under
challenge. It gives opportunity to the Higher Court to see whether or not the
adjudicator has proceeded on the relevant consideration, material and
evidence.

(iv) Having said so, the inordinate unexplained
delay in pronouncement of the impugned judgment had also rendered it
vulnerable.”

 

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Wealth Tax : Valuation of immovable property sublet by tenant : To be determined on basis of rent and deposit received by assessee from tenant, irrespective of rent and deposit received by tenant from sub-tenant

New Page 1

12 Wealth-tax : Valuation of immovable property sublet by
tenant : For determining the value of the property u/r. 3 of Schedule III to W.
T. Act, 1957 the rent and deposit received by the assessee from the tenant and
not the rent and deposit received by the tenant from the sub-tenant or ultimate
user of the premises are to be taken into account.


[CWT v. Spellbound Trading (P) Ltd., 214 CTR 324 (Bom.)]

Dealing with Rule 3 of Schedule III to the Wealth-tax Act,
1957 for valuation of immovable property, the Bombay High Court held as under :

“Rent and deposit received by the assessee from the tenant and not the rent
and deposit received by the tenant from the sub-tenant or ultimate user of the
premises are to be taken into account for determining the value of the property
under Rule 3 of Schedule III to the Wealth-tax Act.”



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Appeal to CIT(A) : S. 143(1) and S. 246 of Income-tax Act, 1961 : A.Y. 1995-96: CIT(A) allowed appeal in respect of one claim and rejected in respect of another : Not justified : Claims on basis of facts on record should be considered : Tax can be collect

New Page 1

 1 Appeal to CIT(A) : S. 143(1) and S. 246 of 
Income-tax Act, 1961 : A.Y. 1995-96: CIT(A) allowed appeal in respect of one
claim and rejected in respect of another : Not justified : Claims on basis of
facts on record should be considered : Tax can be collected only as per law.

[Balmukund Acharya v. Dy. CIT, 176 Taxman
316 (Bom.)]

In the return of income for the A.Y. 1995-96 the
assessee had computed long-term capital gain on sale of godown taking the cost
of acquisition as Nil. However, he had not claimed exemption of the capital
gain. The Assessing Officer passed an order u/s.143(1) of the Income-tax Act,
1961 and sent an intimation and demand notice including interest u/ s.234C of
the Act. In appeal before the CIT(A) the assessee raised two grounds. In the
first ground the assessee claimed that the interest liability u/s.234C is not
applicable in the case of capital gain, as there was no obligation for payment
of advance tax. In the second ground the assessee claimed that there is no tax
liability on the capital gain, since the cost of acquisition was Nil. The
CIT(A) allowed the first ground and directed the Assessing Officer to
recalculate the same. The Tribunal rejected the assessee’s appeal.

On appeal by the assessee, the Bombay High Court allowed the
assessee’s claim and held as under : “(i) For the A.Y. 1995-96, appeal lies
against an intimation u/s.143(1).

(ii) The authorities under the Act are under an
obligation to act in accordance with law. Tax can be collected only as
provided under the Act. If any assessee, under a mistake, misconceptions or on
not being properly instructed, is over-assessed, the authorities under the Act
are required to assist him and ensure that only due legitimate taxes are
collected. If a particular levy is not permitted under the Act, tax cannot be
levied by applying the doctrine of estoppel.

(iii) Acquiescence cannot take away from a party the relief
that she is entitled to where the tax is levied or collected without
authority of law. In the instant case, it was obligatory on the part of
the Assessing Officer to apply his mind to the facts disclosed in the
return and assess the assessee, keeping in mind the law holding the field.

 

(iii) One more aspect needs to be touched while
disposing of the appeal. The
Commissioner (Appeals) had entertained appeal in part and rejected in part.
If the appeal is not maintainable, it is not maintainable at all. It cannot
be said that for a particular ground, an appeal is maintainable and for
another it is not. Once the appeal is filed and entertained, then all
grounds can be raised by the appellant requiring consideration. If the
Revenue was of the view that an appeal itself was not maintainable before
the Commissioner (Appeals), in that event, the order of the Commissioner
(Appeals) allowing appeal in part was bad order and that part of the order
ought to have been challenged by the Revenue. The Revenue did not challenge
the said order believing maintainability of the appeal. The Revenue at that
stage could not be allowed to contend otherwise. It could not be allowed to
blow hot and cold. Thus, taking an overall view of the matter and for the
reasons recorded, the appeal preferred by the assessee was very much
maintainable.”

 

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Survey : S. 69 and S. 133A : Addition to income merely on the basis of the statement recorded in the course of survey : Invalid

New Page 1

11 Survey : S. 69 and S. 133A of Income-tax Act, 1961 : A.Y.
2001-02 : Addition to income merely on the basis of the statement recorded in
the course of survey : Not valid.


[CIT v. S. Khader Khan Son, 214 CTR 589 (Mad.)]

On 24-07-2001, survey action u/s.133A of the Income-tax Act,
1961 was carried out in the premises of the assessee, wherein a statement of the
partner was recorded offering an additional income of Rs.20,00,000 for the A.Y.
2001-02 and Rs.30,00,000 for the A.Y. 2002-03. The said statement was retracted
by the assessee through a letter dated 3-8-2001. The Assessing Officer made
additions to the income on the basis of the survey. The CIT(A) and the Tribunal
deleted the addition.

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

“S. 133A does not empower any I. T. Authority to examine
any person on oath, hence, any such statement has no evidentiary value and any
admission made during such statement cannot, by itself, be made the basis for
addition.”




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Impounding of documents : Scope of power u/s.131(3) of Income-tax Act, 1961 : Document does not include passport : Passport cannot be impounded u/s.131.

New Page 1

Reported :

25 Impounding of documents : Scope of power u/s.131(3) of
Income-tax Act, 1961 : Document does not include passport : Passport cannot be
impounded u/s.131.

[Avinash Bhosale v. UOI, 322 ITR 381 (Bom.)]

In a writ petition challenging the authority of impounding of
the passport with reference to S. 131(3) of the Income-tax Act, 1961, the Bombay
High Court held as under :

“(i) In Suresh Nanda’s case (2008) 3 SCC 674, the Supreme
Court was dealing with power of a Court to impound a document and, in that
context, held that ‘document’ does not include a passport.

(ii) If by an interpretative process the Supreme Court held
that even a Court cannot impound a passport, then, it would be highly
inappropriate to interpret the term ‘documents’ used in S. 131(3) of the
Income-tax Act, 1961, so as to enable the executive authorities to impound the
passport.

(iii) A passport cannot be impounded u/s.131 of the Act.”

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Assessment : Validity : Block period 1-4-1990 to 20-8-2000 : Copies of seized material not provided to assessee, nor assessee given opportunity to cross-examine person whose statement AO relied upon : Fatal to proceedings : Addition cannot be sustained.

New Page 1

Reported :

23 Assessment : Validity : Block period 1-4-1990 to
20-8-2000 : Copies of seized material not provided to assessee, nor assessee
given opportunity to cross-examine person whose statement AO relied upon : Fatal
to proceedings : Addition cannot be sustained.

[CIT v. Ashwani Gupta, 322 ITR 396 (Del.)]

In an appeal against the block assessment order the
Commissioner (Appeals) found that the Assessing Officer had passed the
assessment order in violation of the principles of natural justice inasmuch as
he had neither provided copies of the seized material to the assessee, nor had
he allowed the assessee to cross-examine the person on the basis of whose
statement the addition was made. He therefore held that the entire addition made
by the Assessing Officer was invalid and accordingly deleted the addition. The
Tribunal confirmed 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) The Revenue had accepted the findings of the Tribunal
on facts as also the position that there had been a violation of the
principles of natural justice. However, its plea was that the violation of the
principles of natural justice was not fatal so as to jeopardise the entire
proceedings.

(ii) The Tribunal correctly held that once there was a
violation of the principles of natural justice inasmuch as seized material was
not provided to an assessee, nor was cross-examination of the person on whose
statement the Assessing Officer relied upon, granted, such deficiencies would
amount to a denial of opportunity and, consequently, would be fatal to the
proceedings.

(iii) No substantial question of law arose.”


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Business expenditure : Expenditure on prospecting, etc. of minerals : Applicability of S. 35E of Income-tax Act, 1961 : A.Y. 2001-02 : Assessee in business of prospecting or exploration of ores and minerals and not in business of mining ores and minerals

New Page 1

Reported :

24 Business expenditure : Expenditure on prospecting, etc. of
minerals : Applicability of S. 35E of Income-tax Act, 1961 : A.Y. 2001-02 :
Assessee in business of prospecting or exploration of ores and minerals and not
in business of mining ores and minerals : No possibility of commercial
production : S. 35E not workable : S. 35E not applicable : Assessee entitled to
deduction of entire expenditure.

[CIT v. ACC Rio Tinto Exploration Ltd., 230 CTR 383
(Del.)]

The assessee company is engaged in the business of
prospecting and exploring ores and minerals. For the A.Y. 2001-02, the Assessing
Officer disallowed the claim for deduction of the expenditure on the ground that
the provisions of S. 35E of the Income-tax Act, 1961 were applicable to the case
of the assessee and that the expenditure will be allowable in the year of
commercial production. The Assessing Officer rejected the contention of the
assessee that the provisions of S. 35E are not applicable since the assessee is
engaged in the business of exploring and prospecting of ores and minerals and
that it was not engaged in commercial production of any mineral. The CIT(A)
found that the activity of exploration constituted a separate activity by itself
as different and distinct from commercial production and allowed the assessee’s
claim. The Tribunal upheld the decision of the CIT(A).

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

“(i) Upon a plain reading of the provisions of S. 35E, it
is apparent that unless and until there is commercial production, the
provisions of S. 35E(1) would be unworkable. The expression ‘year of
commercial production’ referred to in S. 35E(2) is defined in S. 35E(5)(b).
Unless and until there is actual commercial production, the phrase ‘year of
commercial production’, appearing in S. 35E(2), would be rendered meaningless.

(ii) The Tribunal has, on facts, come to the conclusion
that the assessee-company’s objects did not include mining of ores or minerals
or commercial production, in the sense understood within the meaning of S.
35E. Consequently, the Tribunal agreed with the assessee’s contention that
there would never be commercial production of any mineral or ore as a part of
the activities of the assessee.

(iii) Consequently, the provisions of S. 35E would not be
applicable to the facts and circumstances of the present case as there was no
possibility of any commercial production.”


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Revision : S. 197 and S. 264 of Income-tax Act, 1961 : An order rejecting application u/s.197 for lower rate for deduction of tax is an order which can be revised u/s.264.

New Page 1

Unreported

22 Revision : S. 197 and S. 264 of Income-tax Act, 1961 : An
order rejecting application u/s.197 for lower rate for deduction of tax is an
order which can be revised u/s.264.

[Larsen & Toubro Ltd. & Anr. (Bom.), W.P.(L) No. 694
of 2010, dated 28-4-2010]

On 29-10-2009, the petitioner had made an application to the
Assessing Officer u/s.197 of the Income-tax Act, 1961 for issuing a certificate
authorising MMRDA to deduct tax at source at a lower rate of 0.11% from the
payments made by it to the petitioner under a contract. The application was
rejected by the Assessing Officer. The petitioner therefore preferred a revision
petition u/s.264 to the Commissioner. The Commissioner rejected the application
inter alia on the ground that when the Assessing Officer rejects an
application u/s.197, he does not pass an ‘order’ as envisaged in S. 264 and
consequently, a revision u/s.264 is not maintainable.

The Bombay High Court allowed the writ petition filed by the
petitioner challenging the order of the Commissioner and held as under :

“(i) The Commissioner is manifestly in error when he holds
that the rejection of an application u/s.197 by the Assessing Officer does not
result in an order and that the revisional power which is vested in the
Commissioner u/s.264 would not be attracted.

(ii) The Assessing Officer when he rejects an application
is bound to furnish reasons which would demonstrate an application of mind by
him to the circumstances which are mandated both by the statute and by the
Rules to be taken into consideration. Hence, it would be impossible to accept
the view that the rejection of an application u/s.197 does not result in an
order.

(iii) The expression ‘order’ for the purposes of S. 264 has
a wide connotation. The Parliament has used the expression ‘any order’. Hence,
any order passed by an authority subordinate to the Commissioner, other than
an order to which S. 263 applies, is subject to the revisional jurisdiction
u/s.264. A determination of an application u/s.197 requires an order to be
passed by the Assessing Officer after application of mind to the circumstances
which are germane u/s.197 and the rules framed U/ss.2A.

(iv) The Commissioner was, therefore, manifestly in error
when he held that there was no order which would be subject to his revisional
jurisdiction u/s.264.”


Reported :

23 Assessment : Validity : Block period 1-4-1990 to
20-8-2000 : Copies of seized material not provided to assessee, nor assessee
given opportunity to cross-examine person whose statement AO relied upon : Fatal
to proceedings : Addition cannot be sustained.

[CIT v. Ashwani Gupta, 322 ITR 396 (Del.)]

In an appeal against the block assessment order the
Commissioner (Appeals) found that the Assessing Officer had passed the
assessment order in violation of the principles of natural justice inasmuch as
he had neither provided copies of the seized material to the assessee, nor had
he allowed the assessee to cross-examine the person on the basis of whose
statement the addition was made. He therefore held that the entire addition made
by the Assessing Officer was invalid and accordingly deleted the addition. The
Tribunal confirmed 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) The Revenue had accepted the findings of the Tribunal
on facts as also the position that there had been a violation of the
principles of natural justice. However, its plea was that the violation of the
principles of natural justice was not fatal so as to jeopardise the entire
proceedings.

(ii) The Tribunal correctly held that once there was a
violation of the principles of natural justice inasmuch as seized material was
not provided to an assessee, nor was cross-examination of the person on whose
statement the Assessing Officer relied upon, granted, such deficiencies would
amount to a denial of opportunity and, consequently, would be fatal to the
proceedings.

(iii) No substantial question of law arose.”


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Reassessment : S. 147, S. 148 and S. 154 of Income-tax Act, 1961 : A.Y. 2004-05 : Reason to believe : Where the AO has option to rectify the assessment order u/s.154, reopening of assessment u/s.147 is not justified.

New Page 1

Unreported

20 Reassessment : S. 147, S. 148 and S. 154 of Income-tax
Act, 1961 : A.Y. 2004-05 : Reason to believe : Where the AO has option to
rectify the assessment order u/s.154, reopening of assessment u/s.147 is not
justified.

[Hindustan Unilever Ltd. v. Dy. CIT (Bom.), W. P. No.
85 of 2009, dated 1-4-2010]

In the case of the petitioner, the assessment for the A.Y.
2004-05 was completed by an order dated 27-12-2006 passed u/s.143(3) of the
Income-tax Act, 1961. Subsequently, the Assessing Officer issued a notice
u/s.148, dated 7-4-2008 for reopening the assessment. Briefly, the reasons given
for reopening the assessment are as under :

“(i) The following deductions have been wrongly allowed in
the assessment order passed u/s. 143(3) of the Act :


(a) Deduction of Rs.10,84,07,449 as loss of plantation
division, being 40% of the loss on sale of tea is wrongly allowed. Rule 8
applies to income and not for loss.

(b) Deduction of Rs.3,07,50,000 u/s.54EC has been
wrongly allowed since the transfer of the asset is on 29-9-2003 and the
date of allotment of the bond is 31-3-2004, which is beyond the prescribed
period of six months.

(c) Loss of Rs.1,33,49,654 of a unit eligible for
deduction u/s.10B has been wrongly allowed to be set off against normal
business income and this has resulted in excessive deduction u/s.10B to
that extent.

(ii) Deduction of loss of Rs.10,84,07,449 from
plantation division has been allowed twice and as such there is
computation error.



The Bombay High Court quashed the notice u/s. 148, dated
7-4-2008 and held as under :

“(i) Loss from plantation division : Rule 8 creates
a legal fiction, as a result of which the income which is derived from the
sale of tea is to be computed as if it is income derived from business. In the
present case, the Assessing Officer, while issuing a notice for re-opening the
assessment, observed that the provisions of Rule 8 are applicable ‘only in the
case of income’ and the claim of the assessee to set off 40% of losses against
normal business profits could not be allowed. On this basis the Assessing
Officer has formed the opinion that the loss of Rs.10.84 crores attributable
to the business activity of the assessee involving the manufacture and sale of
tea was liable to be disallowed. It is on the basis of Rule 8 that the
Assessing Officer seeks to postulate that the loss attributable to the
business activity of the assessee would have to be disregarded on the ground
that it is not allowable expenditure. This inference which is sought to be
drawn by the Assessing Officer is contrary to the plain meaning of the
charging provisions of the Act; and to Rule 8, besides being contrary to the
position in law as laid down by the Supreme Court. The assessee was lawfully
entitled to adjust the loss which arose as a result of the business activity
under Rule 8.

(ii) Deduction u/s.54EC : The assessee transferred
the asset on 29-9-2003. The period of six months was due to expire on
28-3-2004. The assessee invested an amount of Rs.3.07 crores on 19-3-2004. A
receipt was issued on that date by the National Housing Bank. A debit was
reflected in the bank account of the assessee to the extent of the sum
invested on 19-3-2004. The certificate of bond was issued by the National
Housing Bank on 9-6-2004, which refers to the date of allotment as 31-3-2004.
For the purpose of the provisions of S. 54EC, the date of the investment by
the assessee must be regarded as the date on which the payment was made and
received by the National Housing Bank. This was within a period of six months
from the date of the transfer of the asset. Consequently the provisions of S.
54EC were complied with by the assessee. There is absolutely no basis in the
ground for re-opening the assessment.

(iii) Loss incurred by eligible unit u/s.10B : While
re-opening the assessment, the Assessing Officer has proceeded on the basis
that S. 10B provides an exemption and that in respect of the Crab Stick Unit
the assessee had suffered a loss of Rs.1.33 crores. The Assessing Officer has
observed that since the income of the unit was exempt from taxation, the loss
of the unit could not have been set off against the normal business income.
However this was allowed by the assessment order and it is opined that the
assessee’s income to the extent of Rs.1.33 crores has escaped assessment. The
Assessing Officer while re-opening the assessment ex-facie proceeded on
the erroneous premise that S. 10B is a provision in the nature of an
exemption. Plainly, S. 10B as it stands is not a provision in the nature of an
exemption, but provides for a deduction. The provision as it earlier stood was
in the nature of an exemption. After the substitution of S. 10B by the Finance
Act, 2000, the provision as it now stands provides for a deduction.
Consequently, it is evident that the basis on which the assessment has sought
to be re-opened is belied by a plain reading of the provision. The Assessing
Officer was plainly in error in proceeding on the basis that because the
income is exempted, the loss was not allowable. All the four units of the
assessee were eligible u/s.10B. Three units had returned a profit, while the
Crab Stick Unit had returned a loss. The assessee was entitled to a deduction
in respect of the profits of the three eligible units, while the loss
sustained by the fourth unit could be set off against the normal business
income. In the circumstances, the basis on which the assessment is sought to
be re-opened is contrary to the plain language of S. 10B.

(iv) Computational error : The other ground on which
the assessment is sought to be re-opened is the computational error in the
assessment order resulting in the deduction of the loss from plantation
division of Rs. 10.84 crores twice. There can be no dispute about the position
that the computational error that has been made by the Assessing Officer in
the present case is capable of being rectified u/s.154(1). Where the power to
rectify an order of assessment u/s.154(1) is adequate to meet a mistake or
error in the order of assessment, the Assessing Officer must take recourse to
that power as opposed to the wider power to re-open the assessment. The
assessee cannot be penalised for a fault of the Assessing Officer. The
provisions of the statute lay down overlapping remedies which are available to
the Revenue, but the exercise of these remedies must be commensurate with the
purpose that is sought to be achieved by the Legislature. The re-opening of an
assessment u/s.147 has serious remifications. Therefore, before recourse can
be taken to the wider power to reopen the assessment on the ground that there
is a computation error, as in the present case, the Assessing Officer ought to
have rectified the mistake by adopting the remedy available u/s.154 of the
Act.

All statutory powers have to be exercised
reasonably. Where a statute confers an area of discretion, the exercise of that
discretion is structured by the requirement that discretionary powers must be
exercised reasonably. The remedies which the law provides are tailored to be
proportional to the situation which the remedy resolves. Where the statute
provides for several remedies, the choice of the remedy must be appropriate to
the underlying basis and object of the conferment of the remedy. A simple
computational error can be resolved by rectifying an order of assessment
u/s.154(1). It would be entirely arbitrary for the Assessing Officer to reopen
the entire assessment u/s.147 to rectify an error or mistake which can be
rectified u/s.154. An arbitrary exercise of power is certainly not a
consequence which the Parliament contemplates. We, therefore, hold that in this
case the Revenue has an efficacious remedy open to it in the form of a
rectification u/s.154 for correcting the computational error and that
consequently recourse to the provisions of S. 147 was not warranted.

 For all the aforesaid
reasons, we are of the view that the Assessing Officer could not possibly have
formed a belief that the income chargeable to tax had escaped assessment within
the meaning of S. 147.”

Recovery of tax : Company : Directors liability u/s.179 of Income-tax Act, 1961 : A.Y. 1990-91 : Liability does not extend to penalty payable by the company.

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Unreported

21 Recovery of tax : Company : Directors liability u/s.179 of
Income-tax Act, 1961 : A.Y. 1990-91 : Liability does not extend to penalty
payable by the company.

[Dinesh T. Tailor v. TRO (Bom.), W.P. No. 641 of 2010,
dated 27-4-2010]

The petitioner was a director of a company called Yazad
Investment & Finance Pvt. Ltd. up to 14-10-1989. By an order u/s.179 of the
Income-tax Act, 1961 the Assessing Officer raised a demand of Rs. 12.74 lakhs
against the petitioner, which is the liability of the said company for the A.Y.
1990-91 by way of tax and also the penalty u/s.271(1)(c) payable by the company.

On a writ petition filed by the petitioner challenging the
said order, the Bombay High Court set aside the said order u/s.179 for
reconsideration and also held that the liability of a director u/s.179 does not
extend to the penal liability payable by the company. The High Court held as
under :

“(i) S. 179(1) refers to ‘any tax due from a private
company’ and every director of the company is jointly and severally liable for
the payment of ‘such tax’, which cannot be recovered from the company. The
expression ‘tax due’ and, for that matter the expression ‘such tax’ must mean
tax as defined for the purposes of the Act by S. 2(43).

(ii) ‘Tax due’ will not comprehend within its ambit a
penalty.”


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MAT credit : Interest u/s.234B of Income-tax Act, 1961 : A.Y. 2000-01 : Credit for brought forward MAT is to be given from gross demand before charging interest u/s.234B.

New Page 1

Unreported

19 MAT credit : Interest u/s.234B of Income-tax Act, 1961 :
A.Y. 2000-01 : Credit for brought forward MAT is to be given from gross demand
before charging interest u/s.234B.

[CIT v. Apar Industries Ltd. (Bom.), ITA No. 1036 of
2009, dated 6-4-2010]

In an appeal filed by the Revenue for the A.Y. 2000-01, the
following question was raised before the Bombay High Court :

“Whether on the facts and in the circumstances of the case,
the Tribunal erred in law in holding that credit for brought forward MAT is to
be given from gross demand before charging interest u/s.234B of the Income-tax
Act, 1961 ?”

Following the judgment of the Delhi High Court in CIT v.
Jindal Exports Ltd., 314 ITR 137 (Del.), the Bombay High Court upheld the
decision of the Tribunal and held as under :

“(i) The sum represented by the available MAT credit would
fall within the expression ‘tax . . . . already paid under any provision of
this Act’ in S. 140A(1).

(ii) The expression tax paid ‘otherwise’ in S. 234B(2)
would take within its sweep any tax paid under a provision of the Act,
including the MAT credit.

(iii) The amendment to Explanation (1) of S. 234B by the
Finance Act, 2006 is clarificatory.

(iv) Credit for brought forward MAT is to be given from
gross demand before charging interest u/s.234B.”


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Industrial undertaking : Deduction u/s.80IB of Income-tax Act, 1961 : A.Y. 2000-01 : Interest on delayed payment of sale price is part of sale price : It is derived from the industrial undertaking : Is eligible for deduction u/s.80IB.

New Page 1

Unreported

18 Industrial undertaking : Deduction u/s.80IB of Income-tax
Act, 1961 : A.Y. 2000-01 : Interest on delayed payment of sale price is part of
sale price : It is derived from the industrial undertaking : Is eligible for
deduction u/s.80IB.

[CIT v. Vidyut Corporation (Bom.), ITA(L) No. 2865 of
2009, dated 21-4-2010]

The assessee was engaged in manufacturing electrical fittings
and appliances and was eligible for the deduction u/s.80IB of the Income-tax
Act, 1961. The assessee sells its manufactured products mainly to M/s. Bajaj
Electricals Ltd. Payment is normally made on delivery of goods. In case of delay
the assessee also receives interest for delayed payment. For the A.Y. 2000-01
the Assessing Officer disallowed the claim for deduction u/s.80IB in respect of
interest for delayed payment. The Commissioner 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) What is received by the assessee from the purchaser is
a component of interest towards delayed payment of the price of the goods
sold, supplied and delivered by the assessee. There can be no dispute about
the position that the price realised by the assessee from the sale of goods
manufactured by the industrial undertaking constitutes a component of the
profits and gains derived from the eligible business. The purchaser, on
account of delay in payment of the sale price also pays to the assessee
interest. This forms a component of the sale price and is paid towards the lag
which has occurred in the payment of the price of the goods sold by the
assessee.

(ii) On these facts, therefore, the payment of interest on
account of the delay in payment of the sale price of the goods supplied by the
undertaking partakes the same nature and character as the sale consideration.
The delayed payment charges consequently satisfy, together with the sale
price, the first degree test which has been laid down by the Supreme Court in
Liberty India v. CIT, 317 ITR 218.”


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Search and Seizure : Ss. 10(22) and 132(5) of I. T. Act, 1961 : A. Ys. 1984-85 to 1990-91 : Summary assessment u/s. 132(5) : Assessee claiming exemption u/s. 10(22) : Prima facie correctness of claim has to be considered.

New Page 1

  1. Search and Seizure : Ss. 10(22) and 132(5) of I. T. Act,
    1961 : A. Ys. 1984-85 to 1990-91 : Summary assessment u/s. 132(5) : Assessee
    claiming exemption u/s. 10(22) : Prima facie correctness of claim has to be
    considered.

[Anjum Hami-E-Islam vs. CIT; 310 ITR 37 (Bom)]

    Petitioner Trust was running 12 educational institutions and was entitled to exemption u/s. 10(22) of the Income-tax Act, 1961. In February 1991 search proceedings were carried out in the premises of the Petitioner Trust and fixed deposits worth Rs. 93 lakhs were seized and an order u/s. 132(5) was passed determining the tax liability without considering the exemption allowable u/s. 10(22) of the Act. The Commissioner also rejected the application u/s. 132(11) without considering the claim for exemption u/s. 10(22) of the Act.

    On a writ petition filed by the Petitioner challenging the order, the Bombay High Court held as under :

    “i) When a public trust like the petitioner which ran a number of educational institutions had claimed exemption in view of the provisions of section 10(22) of the Act, the Officer passing orders u/s. 132(5) had to find out at least prima facie as to why and how such trust was not entitled to exemption.

    ii) The order to the extent that he refused to consider the plea of the petitioner for exemption u/s. 10(22) of the Act was liable to be quashed”.

Return : Defect in return : Ss. 139(9) and 292B of I. T. Act, 1961 : Failure by assessee to sign and verify return : Defect could not be cured : Return invalid : Consequent assessment invalid : Tribun

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  1. Return : Defect in return : Ss. 139(9) and 292B of I. T.
    Act, 1961 : Failure by assessee to sign and verify return : Defect could not
    be cured : Return invalid : Consequent assessment invalid : Tribun



 


[CIT vs. Harjinder Kaur; 310 ITR 71 (P&H)].

The return filed by the assessee was neither signed by the
assessee nor verified by the assessee. The Tribunal held that the return of
income was not valid and therefore, the consequent assessment order is also
invalid.

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

“i) The provisions of section 292b of the Income-tax Act,
1961, do not authorise the Assessing Officer to ignore a defect of a
substantive nature and therefore, the provision categorically records that a
return would not be treated as invalid, if the same “in substance and effect
is in conformity with or according to the intent and purpose of this Act”.

ii) The return did not bear the signature of the assessee
and had not also been verified by her. Hence, the return was an absolutely
invalid return as it had a glaring inherent defect which could not be cured
in spite of the deeming effect of section 292B”.

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Reference to Valuation Officer : S. 55A of I. T. Act, 1961 : A. Y. 1996-97 : Reference to Valuation Officer can be made only after AO records opinion that the value had been underestimated by the assessee: Reference before filing of return by assessee : N

New Page 1

  1. Reference to Valuation Officer : S. 55A of I. T. Act,
    1961 : A. Y. 1996-97 : Reference to Valuation Officer can be made only after
    AO records opinion that the value had been underestimated by the assessee:
    Reference before filing of return by assessee : Not valid.



 


[Hiaben Jayantilal Shah vs. ITO; 310 ITR 31 (Guj)].

For the A. Y. 1996-97, the petitioner assessee had filed
the return of income on 27.08.1996. The assessee had computed capital gain by
adopting the market value of the asset as on 01.04.1981, determined by the
registered valuer to be the cost of acquisition by exercising option u/s.
55(2) of the Income-tax Act, 1961. The assesee received a notice from the
Valuation Officer informing that a reference was made by the Assessing Officer
on 26/04/1996 u/s. 55A of the Act.

On a writ petition filed by the assessee challenging the
reference, the Gujarat High Court held as under :

“i) Clause (b) of section 55A of the Income-tax Act,
1961, can be invoked only when the value of the asset claimed by the
assessee is not supported by the valuation report of a registered valuer.
For invoking section 55A of the Act, there has to be a claim made by the
assessee, before the Assessing Officer can record his opinion either under
clause (a) or clause (b) of section 55A of the Act to make a reference to
the Valuation Officer.

ii) In so far as the fair market value of the property as
on 01/04/1981, was concerned, the petitioner had claimed it at a sum of
Rs.6,25,000 as per the registered valuer’s report. Therefore, the Assessing
Officer was required to form an opinion that the value so claimed was less
than the fair market value. The estimated value proposed by the Valuation
Officer was shown at Rs.3,97,000 which was less than the fair market value
shown by the assessee. Therefore, clause (a) of section 55A of the Act could
not be made applicable.

iii) Clause (b) of section 55A of the Act can be invoked
only in any other case, namely, when the value of the asset claimed by the
assessee was not supported by an estimate by a registered valuer. In the
facts of the present case, clause (b) of section 55A of the Act also could
not be invoked.

iv) The reference was made on 26/04/1996, whereas the
return of income had been filed by the assessee only on 27/08/1996. Hence on
the date of making the reference by the Assessing Officer, no claim was made
by the assessee and the Assessing Officer could not have formed any opinion
as to the existence of prescribed difference between the value of the asset
as claimed by the assessee and the fair market value. Therefore also, the
provisions of section 55A of the Act, could not be resorted to.

v) The only ground on which reference was made to the
Valuation Officer was that the value declared by the assessee as on the date
of the execution and registration of the sale deed was lower by more than
25%. There was no provision in the Act which permits the Assessing Officer
to disturb the sale consideration, at least section 55A of the Act could not
be invoked for the said purpose.

vi) The reference to the valuation officer was not
valid”.

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Business expenditure : Disallowance u/s. 40A(2) of I. T. Act, 1961 : A. Ys. 1991-92 and 1992-93: Incentive commission paid to sister concern : Sister concern paying tax at a higher rate : Not a case of evasion of tax: Deduction to be allowed.

New Page 1

  1. Business expenditure : Disallowance u/s. 40A(2) of I. T.
    Act, 1961 : A. Ys. 1991-92 and 1992-93: Incentive commission paid to sister
    concern : Sister concern paying tax at a higher rate : Not a case of evasion
    of tax: Deduction to be allowed.



 


[CIT vs. Indo Saudi Services (Travel) P. Ltd., 310
ITR 306 (Bom)].

The assessee was a general sales agent of a foreign airline
S. For the A. Ys. 1991-92 and 1992-93 the Assessing Officer found that the
incentive commission paid by the assessee to the sister concern was half
percent more than that paid to other sub-agents. Relying on the provisions of
section 40A(2) of the Income-tax Act, 1961, the Assessing Officer disallowed
the excess commission paid to the sister concern at the rate of half percent.
The Tribunal deleted the additions.

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

“i) Under the CBDT Circular No. 6-P, dated 06/07/1968, it
is stated that no disallowance is to be made u/s. 40A(2) in respect of the
payments made to the relatives and sister concerns where there is no attempt
to evade tax.

ii) The learned Advocate appearing for the appellant was
not in a position to point out how the assessee evaded payment of tax by the
alleged payment of higher commission to its sister concern since the sister
concern was also paying tax at higher rate and copies of the assessment
orders of the sister concern were taken on record by the Tribunal.

iii) In view of the aforesaid admitted facts we are of
the view that the Tribunal was correct in coming to the conclusion that the
Commissioner of Income-tax (Appeals) was wrong in disallowing half percent
commission to the sister concern”.

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Appeal to Appellate Tribunal : Fees : S. 253(6) of I. T. Act 1961 : Appeal against levy of penalty : Appeal fees is Rs.500 and not based on income assessed : Tribunal calling for fees based on income assessed : Not proper.

New Page 1

Reported :

  1. Appeal to Appellate Tribunal : Fees : S. 253(6) of I. T.
    Act 1961 : Appeal against levy of penalty : Appeal fees is Rs.500 and not
    based on income assessed : Tribunal calling for fees based on income assessed
    : Not proper.

 

[Dr. Ajit Kumar Pandey vs. ITAT; 310 ITR 195 (Pat)].

In respect of an appeal filed by the assessee before the
Tribunal, against levy of penalty u/s. 271 of the Income-tax Act, 1961, the
assessee had paid Rs.500 as appeal fees. The appeal was decided ex parte.
The assessee applied for restoration of the ex parte order. The
Tribunal agreed to recall the ex parte order and to decide the appeal
on merits provided the assessee furnished the deficit court fee of Rs.8,330.

The assessee challenged the order by filing a writ
petition. The Patna High Court allowed the writ petition and held as under :

“i) In the case of an appeal where the total income of
the assessee is ascertainable from the appeal itself, i.e. when the
appellant was seeking to challenge the assessment of his total income, fees
as mentioned in clauses (a), (b) and (c) would be required to be paid.

ii) Clause (d) deals with other appeals. Imposition of
penalty u/s. 271 of the Act had no connection or bearing with the total
income of the assessee. If a person aggrieved by an order imposing penalty,
approaches the Tribunal by preferring an appeal, imposition of penalty
having no nexus with the total income of the assessee, it would not be
discernible what is the total income of the appellant and accordingly such
an appeal would be covered by clause (d).

iii) The important words used in clauses (a), (b) and (c)
of sub-section (6) of section 253 are ‘total income of the assessee’.
Therefore that may not be discernible.

iv) The order of the Tribunal was liable to be set aside
and the appeal was remitted for decision on merits.”

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Business expenditure : Deduction u/s. 37(1) of I. T. Act, 1961 : A. Y. 2000-01 : Provision for liability is deductible if there is an element of certainty that it shall be incurred : Provision for ‘long service award’ is allowable as deduction.

New Page 1

Reported :

  1. Business expenditure : Deduction u/s. 37(1) of I. T.
    Act, 1961 : A. Y. 2000-01 : Provision for liability is deductible if there is
    an element of certainty that it shall be incurred : Provision for ‘long
    service award’ is allowable as deduction.



 


[CIT vs. Insilco Ltd.; 179 Taxman 55 (Del)].

The assessee company had evolved a scheme whereby,
employees who rendered long period of service to the assessee, were made
entitled to monetary awards at various stages of their employment equivalent
to a defined period of time. On the basis of actuarial calculation the
assessee made provision for ‘long service award’ payable to its employees
under the scheme and claimed deduction of the same. The Assessing Officer
disallowed the claim on the ground that the grant of award was at the
discretion of the management and therefore, it could not be said to be a
provision towards ascertained liability. The Tribunal allowed the assessee’s
claim.

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

“i) There was no merit in the submission of the revenue
that the liability of the assessee under the long service award scheme was
contingent as the payment under the said scheme was dependent on the
discretion of the management. It is well-settled that if the liability
arises within the accounting period, the deduction should be allowed though
it may be quantified and discharged at a future date. Therefore, the
provision for a liability is amenable to a deduction, if there is an element
of certainty that it shall be incurred and it is possible to estimate
liability with reasonable certainty even though actual quantification may
not be possible, such a liability is not of a contingent nature.

ii) In the instant case, since the provision for ‘long
service award’ was estimated based on actuarial calculations, the deduction
claimed by the assessee had to be allowed.”

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Collection of tax at source : S. 206C of I. T. Act, 1961 : Tax not collected by petitioner during period of stay by High Court : No failure to collect : No liability to pay u/s. 206C(6).

New Page 1

Unreported :

  1. Collection of tax at source :
    S. 206C of I. T. Act, 1961 : Tax not collected by petitioner during period of
    stay by High Court : No failure to collect : No liability to pay u/s. 206C(6).

 

[The Satpuda Tapi Parisar Sahakari Sakhar Karkhana Ltd.
vs. CIT (Bom); W. P. No. 3357 of 1996; Dated 13/04/2009.].

The petitioner is a co-operative sugar factory and is a
manufacturer of country liquor. When the provisions of section 206C of the
Income-tax Act, 1961 were made applicable to the sale of country liquor, the
purchasers of country liquor challenged the provision by filing writ
petitions. The High Court granted stay of the operation of the provision and
the petitioner was directed by the High Court not to collect tax u/s. 206C in
respect of the sale of country liquor to such purchasers. Subse-quently, the
stay was vacated by the High Court. In respect of such cases the petitioner
did not collect tax on such sales only during the period of stay. For the
remaining period and in all other cases the petitioner had collected tax and
had deposited it in the treasury. After the stay was vacated the ITO Nashik
held that during the period of stay the petitioner was required to collect tax
at source of Rs.25,40,738. He therefore held that the petitioner is liable to
pay the said amount u/s. 206C(6) in spite of the fact that the petitioner had
not collected the amount in view of the stay order passed by the High Court.
Accordingly, he raised a demand of Rs.25,40,738 u/s. 206C(6) of the Act. The
Commis-sioner of Income-tax dismissed the revision petition.

The Bombay High Court allowed the writ petition challenging
the said order and the demand and held as under :

“i) The short question that we are called upon to
consider is whether considering the interim relief granted by this Court
whereby the petitioner herein was restrained from collecting the tax from
the purchasers, would invite the provisions of section 206C of the Act.

ii) U/s. 206C(1) every person, being a seller, had to
collect from the buyer of any goods of the nature specified in clause (2) of
the Table a sum equal to a percentage specified in the said Table. Under
sub-section (6) of section 206C any person responsible for collecting tax in
accordance with the provisions of this section shall, notwithstanding such
failure, be liable to pay the tax to the credit of the Central Government in
accordance with the provisions of sub-section (3). Sub-section (3) of
section 206C sets out that any person collecting any amount has to credit
the same to the credit of the Central Government as prescribed.

iii) On an order passed by this Court restraining the
petitioner from collecting the tax for the period, from the date of stay
till its vacation, is the petitioner liable pursuant to the provisions of
section 206C(6) ? The language used is any person responsible for collecting
the tax and who fails to collect the tax. It is true that the petitioner
being a seller is normally responsible. However, does it amount to ‘failure
to collect’ when he was restrained from collecting the tax ? Would he then
be responsible to collect the tax ? In the instant case admittedly
considering the language of the interim relief itself the petitioner who
otherwise was responsible for collecting the tax was prevented from
collecting the tax. Once the petitioner was prevented from collecting the
tax, it cannot be said that he was ‘a person responsible for collecting the
tax’. The responsibility would have arisen if he could collect the tax. The
expression ‘responsible’, therefore, has to be read in the context of
statutory duty to collect which the petitioner was bound to perform by
virtue of the provisions.

iv) The order of the Court would be binding and had to be
complied with. The issue of collection would arise at the point of sale. The
interim order was a blanket order of restriction from collecting. The
question of the petitioner, therefore, collecting the tax and therefore,
being responsible would not arise. There was bar on him to collect the tax.
If he could not collect the tax at the point of time of order, the question
of he depositing the sum u/ss. (3) or (6) of section 206C would not arise
till such period the disability disappeared. Alterna-tively on account of
the interim relief it cannot be said to be ‘failure to collect’. Failure
would contemplate an act of omission on the part of the party. The party was
aware that he had to collect the tax. This Court however, at the instance of
the buyer restrained him from collecting the tax.

v) In the instant case the disability disappeared on the
stay being vacated by this Court. Thus for the period when the stay was in
operation, as the petitioner was prevented from collecting the tax it cannot
be said that he would be liable under sub-section (6) of section 206C. A
duty was cast on the petitioner by operation of law. Petitioner could not
discharge that duty by virtue of an order of this Court. The question,
therefore, of calling on him to pay the amount which he was disabled to
collect would be illegal. If the petitioner had collected the tax it would
have been in contempt of this Court. We are, therefore, clearly of the
opinion that even though it can be said that considering the provisions of
section 206C a duty had been cast on persons like the petitioner to collect
the tax, by virtue of the interim relief he could not collect the tax for
the relevant period. Section 206C would, therefore, not be attracted.”

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Settlement of cases : Abatement of proceedings : Constitutional validity : By way of interim relief Settlement Commission directed not to consider application of assessee having abated u/s.245HA for want of compliance with S. 245D(2D) as amended by the Fi

New Page 1

27 Settlement of cases : Abatement of
proceedings : S. 245D(2D) and S. 245HA of Income-tax Act, 1961 : Constitutional
validity : By way of interim relief, Setlement Commission directed not to
consider the application of the assessee having abated u/s.245HA for want of
compliance with S. 245D(2D) as amended by the Finance Act, 2007.


[Sunita Textiles Ltd v. CIT & Ors., 216 CTR 74 (Bom.)]

The constitutional validity of S. 245D(2D) and S. 245HA as
amended by the Finance Act, 2007 was
challenged by filing writ petition. The Bombay High
Court admitted the writ petition and granted interim relief directing the
Settlement Commission not to consider the settlement application filed by the
petitioner having abated u/s.245HA for want of compliance with S. 245D(2D) of
the Income-tax Act, 1961.





 

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

“(i) There is no dispute that the earlier CIT(A)’s
order has become final and also the AO passed the consequent orders in
giving effect to the said CIT(A)’s order. There was no further appeals by
the Revenue. Though the said CIT(A)’s order is erroneous in view of the
Supreme Court judgment in the case of CIT v. Venkateshwara Hatcheries
(P) Ltd., 237 ITR 174 (SC), the same has not been set aside by the
process known to law.

(ii) The Tribunal is correct in holding that the
Assessing Officer has no jurisdiction to reopen the assessment u/s.147.
Unless and until the said order is set aside by the process known to law,
the said order is valid in law, as well as it binds on the lower
authorities. Hence, the Assessing Officer is not entitled to circumvent
the earlier order passed by the CIT(A) which had become final. Under such
circumstances, the Assessing Officer should not reopen the assessment and
seek to adjudicate on the issue which was already adjudicated by the
Appellate authority.

(iii) The Tribunal correctly decided the matter and the
reasons given by the Tribunal are based on valid materials and evidence,
and there is no error or legal infirmity in the order of the Tribunal so
as to warrant interference.”

Valuation of stock : Revenue to prove valuation incorrect : Cannot rely on statement by assessee to its bank

New Page 1

28 Valuation of stock : Rejection of
valuation : Burden on Revenue to prove valuation incorrect : Revenue
cannot rely on statement by assessee to its bank : A.Y. 1991-92.

[CIT v. Acrow India Ltd., 298 ITR 447 (Bom.)]


For the A.Y. 1991-92, the Assessing Officer made an
addition of Rs.17,79,248 by revaluing the closing stock relying on the
statement given by the assessee to its bank. The Tribunal deleted the
addition.


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


“(i) As far as this aspect is concerned, the
statement given by the respondent-assessee to the bank is sought to be
relied on by the Revenue. As far as that aspect is concerned, the
Tribunal has clearly held that the valuation of the stock declared to
the bank is in fact inflated and that the correct valuation of the stock
was not suppressed from the Revenue.


(ii) The Tribunal has relied on the judgment of the
Madras High Court in the case of CIT v. N. Swamy, (2000) 241 ITR
363. There the Division Bench has held that the burden of proof in such
a case is on the Revenue and the same could not be discharged by merely
referring to a statement of the assessee to a third party.


(iii) In our view, there is no reason to interfere
with the decision of the Tribunal, inasmuch as it has followed the
decision of the Division Bench of this Court and the Madras High Court.”

S. 147 : CIT(A) allowed deductions u/s.80HH and u/s.80I : Reopening of assessment by AO on basis of subsequent Supreme Court decision is not valid

New Page 1

26 Reassessment : S. 147 of Income-tax
Act, 1961 : A.Ys. 1992-93 and 1993-94 : CIT(A) allowed deductions u/s.80HH
and u/s. 80I : Reopening of assessment by AO on the basis of subsequent
Supreme Court decision is not valid.


[CIT v. Ramachandra Hatcheries, 215 CTR 370
(Mad.)]

For the A.Ys. 1992-93 and 1993-94, the assessee’s claim
for deduction u/s.80HH and u/s.80I was disallowed by the Assessing Officer.
In appeal the CIT(A) allowed the claim. The Assessing Officer gave effect to
the order of the CIT(A) and allowed the claim. Subsequently, the Assessing
Officer reopened the assessment for disallowing the claim relying on the
subsequent judgment of the Supreme Court in the case of CIT v.
Venkateshwara Hatcheries (P) Ltd., 237 ITR 174 (SC). The Tribunal held
that the reopening of the assessment was not valid.

 

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

“(i) There is no dispute that the earlier CIT(A)’s
order has become final and also the AO passed the consequent orders in
giving effect to the said CIT(A)’s order. There was no further appeals by
the Revenue. Though the said CIT(A)’s order is erroneous in view of the
Supreme Court judgment in the case of CIT v. Venkateshwara Hatcheries
(P) Ltd., 237 ITR 174 (SC), the same has not been set aside by the
process known to law.

(ii) The Tribunal is correct in holding that the
Assessing Officer has no jurisdiction to reopen the assessment u/s.147.
Unless and until the said order is set aside by the process known to law,
the said order is valid in law, as well as it binds on the lower
authorities. Hence, the Assessing Officer is not entitled to circumvent
the earlier order passed by the CIT(A) which had become final. Under such
circumstances, the Assessing Officer should not reopen the assessment and
seek to adjudicate on the issue which was already adjudicated by the
Appellate authority.

(iii) The Tribunal correctly decided the matter and the
reasons given by the Tribunal are based on valid materials and evidence,
and there is no error or legal infirmity in the order of the Tribunal so
as to warrant interference.”

Cash credit : S. 68 : Long-term capital gain : Transaction of shares : Addition treating transaction bogus : Addition not valid in absence of cogent material

New Page 1

24 Cash credit : S. 68 of Income-tax Act,
1961 : Long-term capital gain : Transaction of sale of shares : Addition
treating transaction bogus : Addition not valid in the absence of cogent
material.


[CIT v. Anupam Kapoor, 299 ITR 179 (P&H)]

The assessment in this case was completed u/s. 143(3) read
with S. 147 of the Income-tax Act, 1961. The said assessment was reopened on
receipt of the intimation from the DDIT (Investigation), Gurgaon, stating that
the long-term capital gain on sale of shares declared by the assessee was false
and the transaction was not genuine. In the course of reassessment proceedings,
the assessee furnished evidence in support of the claim of long-term capital
gain. The AO made an addition of Rs.1,74,552, being the consideration on sale of
shares, as unexplained cash credit. The Commissioner (Appeals) deleted the
addition, holding that the AO had not discharged his onus and there was no
material or evidence with the AO to come to the conclusion that the transaction
shown by the assessee was a bogus transaction. The Commissioner (Appeals) took
the view that if a company was not available at the given address, it could not
conclusively prove that the company was non-existent. The Tribunal upheld the
decision of the Commissioner (Appeals) and held that the purchase contract note,
contract note for sales, distinctive numbers of shares purchased and sold, copy
of the share certificates and the quotation of shares on the date of purchase
and the sale were sufficient material to show that the transaction was not
bogus, but a genuine transaction.

 

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 material before the AO, which could have
led to a conclusion that the transaction was a device to camouflage activities
to defraud the Revenue. No such presumption could be drawn by the AO merely on
surmises or conjectures.

(ii) The Tribunal took into consideration that it was only
on the basis of a presumption that the AO concluded that the assessee had paid
cash and purchased the shares. In the absence of any cogent material in this
regard, having been placed on record, the AO could not have reopened the
assessment.

(iii) The assessee had made an investment in a company,
evidence whereof was with the AO. Therefore, the AO could not have added the
income, which was rightly deleted by the Commissioner (Appeals) as well as the
Tribunal.”

 


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Dividend income : Deduction u/s.80M : Distribution of interim dividend before due date insufficient compliance of requirement.

New Page 1

25 Dividend income : Deduction u/s.80M of
Income-tax Act, 1961 : A.Y. 1997-98 : Distribution of dividend before due
date : Distribution of interim dividend before due date is in sufficient
compliance of the requirement.


[CIT v. Saumya Finance & Leasing Co. (P) Ltd., 215
CTR 359 (Bom.)]

For the A.Y. 1996-97, the assessee company had filed return
of income including dividend income of Rs.2,69,16,774 and had claimed a
deduction of Rs.2,19,97,105 u/s.80M of the Income-tax Act, 1961 on the basis
of the distribution of interim dividend of Rs.2,19,97,105 before the due date
for filing the return. The Assessing Officer disallowed the claim on the
ground that the condition of distribution of dividend before due date is not
satisfied. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, it was contended on behalf of the
Revenue that the interim dividend was declared by the assessee company in the
financial year 1997-98 and out of income accrued in the said year. It was
further contended that the dividend declared and paid in the subsequent year
could not be a permitted deduction from the income in a previous year, since
the said dividend was paid out of income accruing in the subsequent year.

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

“(i) On the bare reading of S. 80M it is clear that the
deduction as permitted is of an amount equal to so much of the amount of
income by way of dividend declared by the company as does not exceed the
amount of dividend distributed by the assessee on or before the due date. S.
80M does not provide for the nature of the dividend distributed by the
assessee company. It does not state that the nature of the dividend
distributed must be for the financial year under assessment.

(ii) Accepting the argument of the Revenue will amount to
laying down an additional restriction to the effect that the dividend
distributed by the assessee company must be for the financial year under
assessment. Laying down such restricting qualification will amount to doing
violence to the plain and clear meaning of the words as contained in S. 80M.

(iii) This is not a case where a literal construction to
be given to S. 80M would lead to an absurd result. The intention of the
Legislature while enacting S. 80M was clearly to ensure that the dividend
income received by the assessee company should be permitted as a deduction
only if it is redistributed as dividend income to its shareholders. The
section provided that the said distribution is to be made before the due
date of the filing of the returns. This has been done by the present
respondent and all the requirements of S. 80M are clearly met by them.”

Cash credit : S. 68 : Gift from NRI : Copy of deed and affidavit filed : In absence of anything to show that transaction was by way of money laundering, addition cannot be made u/s.68 : Absence of blood relationship is not relevant

New Page 1

23 Cash credit : S. 68 of Income-tax
Act, 1961 : Gift from NRI : Copy of gift deed and affidavit of NRI donor
filed : In the absence of anything to show that the transaction was by way
of money laundering, addition can-not be made u/s.68 : Absence of blood
relationship or close relationship between the donor and the donee is not
relevant.


[CIT v. Padam Singh Chouhan, 215 CTR 303 (Raj.)]

The Revenue had preferred an appeal against the decision
of the Tribunal, deleting the addition made by the Assessing Officer u/s.68
of the Income-tax Act, 1961. The following question was raised in the
appeal :

“Whether in the facts and the circumstances of the
case, the learned Tribunal was justified in deleting the addition of
Rs.4,50,000, Rs.2,50,000 and Rs.2,00,000, which have been received on
account of gift when no relation has been established from whom gifts have
been received, whether the finding of the learned Tribunal is perverse ?”

 


The Rajasthan High Court decided the question in favour
of the assessee, dismissed the appeal and held as under :

“(i) There is no legal basis to assume that to
recognise the gift to be genuine, there should be any blood relationship,
or any close relationship between the donor and the donee. Instances are
not rare, when even strangers make gifts, out of very many considerations,
including arising out of love, affection and sentiments. When the assessee
has produced the copies of the gift deeds and the affidavits of the
donors, in the absence of anything to show that the act of the assessee in
claiming gift was an act by way of money laundering, simply because he
happens to receive gifts, it cannot be said that that is required to be
added in his income.

(ii) The Assessing Officer has assumed doubts against
the donor, merely on the basis of his having deposited certain amounts in
his accounts soon before making the gifts, and that the assessee had
withdrawn the amounts deposited by him, including the amount of the said
gifts in a short span of time. With this, the AO has found, that the facts
created doubts, that how the assessee as well as his family members are
receiving such huge gifts from a person residing abroad, and concluded
that it appears that the gifts are not genuine, and only a managed affair
of the assessee.

(iii) The CIT(A) has reversed his findings by holding
that the assessee had clearly shown from the assessment proceedings that
the gifts were made out of love and affection towards the assessee, and it
is a matter of God’s grace to create love and affection between donors and
donee, and that to have love and affection between two persons, blood
relation is not required, and looking to the status of the donors, the
amount gifted was very meager. Then it was found by the CIT(A) that the
assessee has also furnished the copies of the gift deeds and affidavits of
the donors. In the opinion of the CIT(A), it is not a case where the
assessee had first given such amounts to the donors, and the donors
returned back to the assessee by way of gift. The CIT(A) had gone through
the bank accounts of the donors, copies thereof are on record, and found
that there was sufficient cash balance on the date of gift to the
assessee, in respect of both the donors, and thus, the addition was
deleted.

(iv) The Tribunal has affirmed this finding by relying
upon certain judgments.

Capital gains : Income from sale of milk : Sale of calves : Cost of acquisition not ascertainable : Capital gain not chargeable

New Page 1

22 Capital gains : Assessee deriving
income from sale of milk : Sale of calves : Cost of acquisition not
ascertainable : Capital gain not chargeable to tax.


[Dy. CIT v. Smt. Suniti Singh, 215 CTR 326 (MP)]

The assessee was running a dairy and was deriving income
from sale of cow milk. In the relevant year, the assessee had sold calves. The
assessee claimed that the profit on sale of calves is not chargeable to tax as
the cost of acquisition is not ascertainable. The Assessing Officer observed
that the assessee had claimed depreciation on calves forming a part and parcel
of the live stock and, therefore, it was stock in trade of the assessee and
income from the sale of such stock in trade is liable to tax. Accordingly, the
Assessing Officer made an addition of Rs.68,000. The Tribunal accepted the
assessee’s claim and deleted the addition.

 

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

“(i) The business of the assessee relates to sale of milk
and the female cows constitute assets and they are exploited for production
of milk. The primary motive of the assessee is to fertilise the cows so that
they can yield milk. The income is derived through sale of milk and all
expenses which have gone into are to upkeep them and maintenance of cows,
like purchase of fodder, medicines, etc. are exclusively designed for
obtaining milk and the said expenditure has been shown as revenue
expenditure in the P&L a/c.

(ii) The calves came into being in the process so that
the female cows can be utilised to produce and eventually the milk is sold.
The male calves are sold as they are of no value to the assessee as they
cannot produce milk. There is no material on record to show that the selling
of calves is a part of the business activity of the assessee. Facts brought
on record clearly show that the asessee is engaged in the business activity
which relates to sale of milk.

(ii) The Tribunal is right in holding that the sale of
calves by the assessee cannot be regarded as capital gain since the cost of
acquisition is not ascertainable.”

Search and seizure : Penalty u/s.158BFA(2) : Is directory and not mandatory : AO has discretion to levy or not to levy penalty

New Page 1

54 Search and seizure : Penalty
u/s.158BFA(2) of Income-tax Act, 1961 : Is directory and not mandatory : AO has
discretion to levy or not to levy penalty.


[CIT v. Dodsal Ltd., 218 CTR 430 (Bom.)]

In this case penalty imposed by the Assessing Officer
u/s.158BFA(2) of the Income-tax Act, 1961 was deleted by the CIT(A) and the
order of the CIT(A) was upheld by the Tribunal. In appeal filed by the Revenue
before the Bombay High Court the following questions were raised :

“(i) Whether on the facts and in the circumstances of the
case and in law, the Tribunal is correct in deleting the penalty levied
u/s.158BFA(2) of the Income-tax Act, 1961 without appreciating the fact that the
assessee has failed to comply with the conditions stipulated in the 1st proviso
to S. 158BFA(2) of the Income-tax Act, 1961 ?

(ii) Whether on the facts and in the circumstances of the
case and in law, the Hon’ble Tribunal is correct in interpreting the condition
stipulated in the 1st proviso to S. 158BFA(2) of the Income-tax Act, 1961 as
directory and not mandatory ?”

 

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

“(i) The terminology of S. 158BFA(2) makes it clear that
there is a discretion in the Assessing Officer to direct payment of penalty.
The proviso supports this interpretation. Only if the authority decides to
impose penalty, then it will not be less than the tax leviable, but shall not
exceed three times the tax so leviable.

(ii) It is therefore, not possible to accept the submission
on behalf of the Revenue that once the Assessing Officer comes to the
conclusion that there is breach of the mandate of S. 158BFA(1), then the
penalty should be imposed. Merely because the expression used is “shall not be
less than the amount of tax leviable or not exceeding three times the tax”,
does not result in reading the first part of the Section as mandatory. The
proviso to the sub-section makes it clear that there is discretion conferred
on the CIT(A) for the reasons which are set out therein.

(iii) In the instant case, both the CIT(A) and the Tribunal
have recorded reasons for exercise of their discretion. The Revenue has not
challenged the said finding of fact as to the exercise of discretionary power.
Therefore, the view taken by the Tribunal that the Section is directory and
not mandatory is upheld.”

Reassessment : S. 147 and S. 148 : Reason to believe : AO recording reasons and AO issuing notice u/s.148 different : Notice not valid.

New Page 1

52 Reassessment : S. 147 and S. 148 of
Income-tax Act, 1961 : A.Ys. 1990-91 and 1991-92 : Reason to believe : AO
recording reasons and AO issuing notice u/s.148 different : Notice u/s.148 not
valid.


[Hynoup Food and Oil Industries Ltd. v. ACIT, 307
ITR 115 (Guj.)]

For the A.Ys. 1990-91 and 1991-92 the Assessing Officer
issued notices u/s.148 for reopening the assessments. But the Assessing
Officer who had issued the notice was different from the officer who had
recorded the reasons.

 

On a writ petition filed by the assessee challenging the
validity of the notice u/s.148, the Gujarat High Court quashed the notice and
held as under :

“(i) The opening portion of S. 147 of the Income-tax Act,
1961, stipulates that action may be initiated if the Assessing Officer has
reason to believe that any income chargeable to tax has escaped assessment
for any assessment year. This provision must be read in conjunction with S.
148(2) of the Act which mandates that the Assessing Officer shall, before
issuing any notice u/s.148 of the Act, record his reasons for issuing the
notice. It is, therefore, clear that the officer recording the reasons
u/s.148(2) and the officer issuing notice u/s.148(1) has to be the same
person.

(ii) In the instant case, the officer who had issued the
notice u/s.148 was different from the officer who had recorded the reasons
and hence, the notices for both these years were invalid and deserved to be
quashed.”

 


 


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S. 139 and S. 140 : Return signed by assessee was filed after his death. Not a valid return.

New Page 1

53 Return of income : Signature : S. 139 and
S. 140 of Income-tax Act, 1961 : A.Y. 2003-04 : Return of income signed by
assessee was filed after his death. Not a valid return.



[CIT v. Moti Ram, 175 Taxman 27 (P&H)]

The assessee expired on 14-9-2003. Before death, the
assessee had signed the return of income for the A.Y. 2003-04. The return was
filed on 28-11-2003 i.e., after his death. The Assessing Officer
completed the assessment u/s.143(3) of the Income-tax Act, 1961 in spite of
contention raised by the legal heirs that the return filed by the assessee was
null and void. The CIT(A) cancelled the assessment holding that the return
filed in the name of the assessee after his death was null and void ab
initio, and hence any action taken on such a return was also null and
void. The Tribunal upheld the decision of the CIT(A).

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

“(i) In the instant case the return was filed on
28-11-2003. On that day, the assessee had already expired. The return filed
with the signatures of the assessee after his death cannot be taken as valid
return filed by the assessee himself. Undisputedly, the return was neither
signed, nor verified by the legal heirs of the deceased.

(ii) The return filed in this case was null and void. In
our opinion, no valid assessment could have been made on the basis of an
invalid and void return.”

 


 


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Ss. 147, 148 and Ch. XIV-B : Block period ending on 24-11-1995 : No jurisdiction to reopen block assessment by issuing notice u/s.148.

New Page 1

51 Reassessment : Block assessment : S. 147,
S. 148 and Ch. XIV-B of Income-tax Act, 1961 : Block period ending on
24-11-1995 : There is no jurisdiction to reopen a block assessment by issuing
notice u/s.148.


[Cargo Clearing Agency (Gujarat) v. JCIT, 307 ITR 1 (Guj.);
218 CTR 541 (Guj.)]

Pursuant to a search on 24-11-1995 block assessment was made
u/s.158BD of the Income-tax Act, 1961 in the case of the petitioner.
Subsequently, a notice u/s.148 was issued by the Assessing Officer for reopening
the block assessment. The petitioner filed writ petition challenging the
jurisdiction to reopen the block assessment by issuing notice u/s.148 of the
Act.

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

“(i) When one considers the entire scheme relating to the
procedure for assessment/reassessment as laid down in the group of Sections
from S. 147 to S. 153 and compares with the special procedure for assessment
of search cases under Chapter XIV-B of the Act, it becomes apparent that the
normal procedure laid down by the Chapter XIV of the Act has been given a
go-by when Chapter XIV-B itself lays down that the said Chapter provides for a
special procedure for assessment of search cases. Clause (f) under Ss.(1) of
S. 158BB of the Act provides for reducing the aggregate of the total income
computed for the block period by the aggregate of the total income, in a case
where an assessment for undisclosed income had been made earlier under clause
(c) of S. 158BC, on the basis of such assessment. In other words, it only
means that where a previous assessment has been framed under Chapter XIV-B of
the Act, the aggregate of such total income assessed for the block period in
case of a search where the block period is a different block from the earlier
block period, has to be deducted for assessing for a subsequent block period.

(ii) When this provision is read in the context of S.
158BC, more particularly the first proviso thereunder, it becomes clear that
the Legislature does not intend to reopen a block assessment. Any such
interpretation would run counter to the legislative intent as noted from the
contemporaneous exposition through the memorandum explaining the Finance Bill
as well as the various circulars issued by the Central Board of Direct Taxes
explaining different amendments. In S. 158BA of the Act, there is a positive
mandate to the Assessing Officer to assess the undisclosed income in
accordance with the provisions of Chapter XIV-B of the Act, notwithstanding
anything contained in any other provisions of the Act. As against that, S.
158BH states that except as otherwise provided in Chapter XIV-B of the Act,
all other provisions of the Act, shall apply to assessment made under Chapter
XIV-B. Therefore, once the period of limitation has been prescribed u/s.158BE
of the Act, the time limit for completion of assessment of undisclosed income
has to be as provided under the said section.

(iii) The entire Chapter XIV-B of the Act relates to
assessment of search cases, viz., undisclosed income found as a result
of search. One cannot envisage escapement of undisclosed income once a search
has taken place and material recovered, on processing of which undisclosed
income is brought to tax. S. 147 of the Act itself indicates that it is in
relation to income escaping assessment and applies in a case where either
income chargeable to tax has escaped assessment by virtue of either
non-disclosure by way of non-filing of the return, or non-disclosure by way of
omission to disclose fully and truly all material facts for the purpose of
assessment, or processing of material already available on record, if it is
within the stipulated period of limitation. Therefore, to contend that the
undisclosed income has escaped assessment despite an assessment having been
framed under Chapter XIV-B of the Act by adopting the special procedure
prescribed by the said Chapter, is to contend what is inherently not possible.

(iv) It cannot be a case of non-filing of return
considering the provisions of S. 158BC of the Act. It cannot be a case of
non-disclosure of material facts considering the fact that everything which
was undisclosed has already been unearthed at the time of search and the
definition of ‘undisclosed income’ itself indicates that not only what has
been seized or recovered, but even income or property which has not been or
would not have been disclosed for the purpose of the Act has been roped in.
Further-more, S. 158BB of the Act also provides not only for acquisition of
books of account or other documents, but on the basis of evidence found as a
result of search and such other materials or information as are available with
the Assessing Officer, undisclosed income of block period shall be computed.
Therefore, even if assuming that some income has not been disclosed in the
return furnished u/s. 158BC of the Act, the AO is bound to assess all
undisclosed income after processing the entire material available with the AO.
The AO could not be heard to state that undisclosed income has escaped
assessment because the officer failed to apply his mind to the material
available on record, there being no lack of disclosure.

(v) The entire scheme under Chapter XIV of the Act, more
particularly from S. 147 to S. 153 of the Act, pertaining to reassessment and
the special procedure for assessing the undisclosed income of the block period
under Chapter XIV-B of the Act are not only separate and distinct from each
other, but if an effort is made to incorporate the scheme under Chapter XIV of
the Act, for the purpose of assessment of block period there is a conflict
between the provisions which becomes apparent on a plain reading. In the
circumstances, by the established rules of interpretation, unless and until a
plain reading of the two streams of assessment procedure does not result in
the procedures being independently workable, the question of resolving the
conflict would not arise. But in the light of the provisions of S. 158BH of
the Act, once there is a conflict between the two streams of procedure the
provisions of Chapter XIV-B of the Act shall prevail and have primacy. Once
assessment has been framed u/s.158BA of the Act in relation to undisclosed
income for the block period as a result of search, there is no question of the
AO issuing notice u/s.148 of the Act for reopening such assessment as the said
concept is repugnant to the special scheme of assessment of of undisclosed income for the block period. The first proviso u/s.158BC(a) of the Act specifically provides that no notice u/ s. 148 of the Act is required to be issued for the purpose of proceedings under Chapter XIV-B.”

Cash credits : S. 68 : Share application money : Department must show that investment made by subscribers emanated from coffers of assessee to be treated as undisclosed income of assessee.

New Page 1

49 Cash credits : S. 68 of Income-tax Act,
1961 : A.Y. 2001-02 : Company : Share application money : Department must show
that investment made by subscribers actually emanated from coffers of assessee
to be treated as undisclosed income of assessee.



[CIT v. Value Capital Services P. Ltd., 307 ITR 334
(Del.)]

The assessee had received an amount of Rs.51 lakhs as share
application money from 33 persons in the previous year relevant to A.Y.
2001-02. The Assessing Officer accepted the explanation and the statement
given by three of these persons, but found that the response from the others
was either not available or was inadequate. Therefore, he added an amount of
Rs.46 lakhs pertaining to 30 subscribers to the income of the assessee u/s.68
of the Income-tax Act, 1961. The CIT(A) confirmed the addition.

 

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

“(i) The principle that has been laid down by the various
decisions rendered by this Court from time to time is that if the existence
of the applicant is proved, normally no further inquiry is necessary.

(ii) Learned counsel for the Revenue submits that the
creditworthiness of the applicant can nevertheless be examined by the
Assessing Officer. It is quite obvious that it is very difficult for the
assessee to show the creditworthiness of strangers. If the Revenue has any
doubt with regard to their ability to make the investment, their returns may
be reopened by the Department.

(iii) In any case, what is clinching is the additional
burden on the Revenue. It must show that even if the applicant does not have
the means to make the investment, the investment made by the applicant
actually emanated from the coffers of the assessee, so as to enable it to be
treated as the undisclosed income of the assessee. This has not been done
insofar as the present case is concerned and that has been noted by the
Tribunal also.”

 


 


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Incentive prize received on coupon given on strength of NSC : Is not lottery : Is casual and non-recurring receipt exempt u/s.10(3).

New Page 1

50. Casual and non-recurring receipt :
Exemption u/s.10(3) of Income-tax Act, 1961 : A.Y. 1994-95 : Incentive prize
received on coupon given on the strength of NSC : Is not a lottery : Is casual
and non-recurring receipt exempt u/s.10(3).


[B. K. Suresh v. ITO, 221 CTR 80 (Kar.)]

The assessee, a professor in Engineering College, had
purchased National Saving Certificates (NSCs) in F.Y. 1992-93. The Director of
Small Savings, Government of Karnataka, as a measure to encourage small savings,
framed a scheme under which it offered different prizes to the persons who had
made investment in a small savings scheme, through a lucky draw. By virtue of
the purchase of NSCs, the assessee had become entitled for a coupon.
Accordingly, a coupon was issued to him. In a lucky draw he was adjudged as
prize winner, having bagged third prize. The prize was Indira Vikas Patra of
face value of Rs.5,00,000, the market value being Rs.3,50,000. The assessee
claimed exemption u/s.10(3) of the Income-tax Act, 1961 of the said amount of
Rs.3,50,000. The AO disallowed the same treating the same as a lottery and made
addition of Rs.3,50,000 in his order u/s.143(1)(a) of the Act. The Tribunal
confirmed the addition.

 

On appeal by the assessee, the following questions were
raised :

“1. Whether in the facts and in the circumstances of the
case, the Tribunal was right in law in holding that incentive award received
by the appellant-assessee constitutes lottery income on the facts and in the
circumstances of the case ?

2. Whether the Tribunal was right in law in holding that
the purchase of National Savings Certificates by the appellant-assessee
constitutes payment of consideration to participate in the lottery ?”

 


The Karnataka High Court concurred with the view of the
Madras High Court in CIT v. Dy. Direcor of Small Savings, (2004) 266 ITR
27 (Mad.) that giving of coupons against National Savings Certificates would not
fall within the definition of ‘lottery’. The Court allowed the assessee’s claim
and held as under :

“(i) The definition of ‘lottery’ inserted by the Finance
Act, 2001 is prospective and not retrospective.

(ii) We have no hesitation to hold that all the authorities
below committed an error in adding the prize money awarded to the assessee on
coupon and draw thereof to the income of the assessee. Thus the said orders
deserve to be set aside and quashed and are hereby set aside and quashed.”

 



 



 

 


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Where percentage of commission is not fixed and varies depending on decision of board of directors, commission paid to directors would not be remuneration u/s.40(c).

New Page 1

48 Business expenditure : Disallowance u/s.
40(c) of Income-tax Act, 1961 : Remuneration to director : Where percentage of
commission is not fixed and varies depending on decision of Board of directors,
commission paid to directors would not be remuneration as contemplated
u/s.40(c).


[J. K. Synthetics Ltd. v. CIT, 175 Taxman 22 (Del.)]

The assessee-company paid different amounts to its directors
by way of commission. The Assessing Officer held that wherever payment was above
the ceiling limit of Rs.72,00,000, it was to be disallowed u/s.40(c) of the
Income-tax Act, 1961. Accordingly, he made the disallowance. The disallowance
was upheld by the Tribunal.

 

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

“(i) A perusal of the special resolution passed by the
assessee-company, in terms of which commission was paid to directors made it
clear that the quantum of commission was to be determined at the discretion of
its Board of directors. The commission, that had to be paid in terms of the
special resolution, was up to a maximum limit of 3% of the net profits of the
company. In other words, there was no fixed commission paid to any of the
directors and the amount of commission varied depending upon the decision of
the Board. The factors that the Board was required to take into consideration
had not been spelt out, but one had to proceed on the basis of the decision of
the Board, presuming that the commission payable to the directors was to be
determined on the basis of services
rendered by them or some similar requirements.

(ii) It was possible that the percentage might have a nexus
with the turnover achieved (which was also variable) or the amount of business
given by the director to the assessee (which was also variable). The factors
to be taken into conside-ration for determining the percentage of commission
had not been spelt out in the special resolution. So long as the percentage
was not fixed and was variable, it could not
partake the nature of salary and, therefore, could not partake the nature of
remuneration, which according to the Revenue, is similar to salary.

(iii) Consequently, the commission paid to the directors
could not be said to be remuneration as contemplated by S. 40(c).”

 


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Deduction u/s.36(1)(vii) for bad debt allowable independently, irrespective of deduction for provision for bad and doubtful debts allowable u/s.36(1)(viia) subject to limitation that amount should not be deducted twice

New Page 1

46 Business expenditure : Assessee bank :
Deduction of bad debt u/s.36(1)(vii) and provision for bad debt u/s.36(1)(viia)
of Income-tax Act, 1961 : A.Ys. 1993-94 and 1994-95 : Deduction u/s.36(1)(vii)
for bad debt is allowable independently and irrespective of deduction for
provision for bad and doubtful debts allowable u/s.36(1)(viia) subject to
limitation that amount should not be deducted twice.


[DCIT v. Karnataka Bank Ltd., 218 CTR 273 (Kar.)]

The assessee is a scheduled bank. For the A.Ys. 1993-94 and
1994-95 the assessee bank had claimed deduction of bad debts written off
u/s.36(1)(vii) and also deduction of provision for bad and doubtful debts
u/s.36(1)(viia) of the Income-tax Act, 1961. The Assessing Officer allowed the
claim for deduction of provision for bad and doubtful debts u/s. 36(1)(viia),
but disallowed the claim u/s.36(1)(vii) for bad debts written off. The CIT(A)
upheld the disallowance. The Tribunal allowed the assessee’s claim.

 

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

“The Tribunal was correct in holding that deduction
u/s.36(1)(vii) is allowable independently and irrespective of the provision
for bad and doubtful debts created by the assessee in relation to the advances
of the rural branches u/s.36(1)(viia), subject to the limitation that an
amount should not be deducted twice u/s.36(1)(vii) and u/s. 36(1)(viia)
simultaneously.”

 




 

 


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“Good work reward” by assessee to employee : Amount has no relation to profit earned : Does not amount to bonus : Amount not deductible u/s.36(1)(ii) but deductible u/s.37(1).

New Page 1

47 Business expenditure : Bonus : S.
36(1)(ii) and S. 37(1) of Income-tax Act, 1961 : ‘Good work reward’ given by
assessee for good work done by employee : Amount having no relation to profit
earned : Does not amount to bonus : Amount not deductible u/s.36(1)(ii), but
deductible u/s.37(1).


[Shriram Pistons and Rings Ltd. v. CIT, 307 ITR 363
(Del.)]

The following question was raised before the High Court in a
reference filed by the Revenue :

“Whether the Tribunal was right in holding that the
payments made by the assessee to its employees under the nomenclature ‘Good
work reward’ did not constitute bonus within the meaning of S. 36(1)(ii) of
the Income-tax Act, 1961 and were allowable as normal business expenditure
u/s. 37 ?”

 


The Delhi High Court held as under :

“(i) The word ‘bonus’ has not been defined anywhere
including the Payment of Bonus Act, 1965. However, for the purpose of
industrial law, four types of bonus have been recognised : (a) production
bonus, (b) contractual bonus, (c) customary bonus usually associated with
festivals, and (d) profit-sharing bonus.

(ii) The ‘good work reward’ that was given by the assessee
to some employees on the recommendation of senior officers of the assessee did
not fall in any of the categories of bonus specified under the industrial law.
There was nothing to suggest that the good work reward given by the assessee
to its employees had any relation to the profits that the assessee may or may
not make.

(iii) The reward had relation to the good work done by the
employee during the course of his employment and at the end of the financial
year on recommendation of a senior officer of the assessee, the reward was
given to the employee. Consequently, the ‘good work reward’ could not fall
within the ambit of S. 36(1)(ii) of the Act.

(iv) The ‘good work reward’ was allowable as business
expenditure u/s.37(1) of the Act.”

 


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Ss. 36(1)(ii) and 37(1) : Ex-gratia payment over and above statutory limits prescribed under Payment of Bonus Act, 1965, is allowable as business expenditure.

New Page 1

45 Business expenditure : Bonus : S.
36(1)(ii) and S. 37(1) of Income-tax Act, 1961 : A.Y. 1993-94 : Ex gratia
payment over and above statutory limits prescribed under the Payment of Bonus
Act, 1965, is allowable as business expenditure.


[CIT v. Maina Ore Transport (P) Ltd., 218 CTR 653 (Bom.)]

In the A.Y. 1993-94 the assessee had made payment of ex
gratia in the sum of Rs.2,37,702 to its employees in excess of the limit of
8.33% prescribed under the Payment of Bonus Act. The assessee had claimed the
deduction of the said ex gratia payment as business expenditure. The AO
disallowed the claim on the ground that it is in excess of 8.33% maximum
statutory limit under the Act. The CIT(A) allowed the deduction holding that the
amount was paid to maintain healthy relations and industrial peace. The Tribunal
confirmed the decision of the CIT(A).

 

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

“Ex gratia payment in excess of the limits prescribed under
the Payment of Bonus Act, 1965, is allowable as business expenditure, although
the payment did not cover contractual payment or customary payment.”

 


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Wealth tax : Asset : S. 2(ea) of Wealth-tax Act, 1957 : A.Ys. 1997-98 and 1998-99 : Commercial asset used by assessee in business of letting out properties : Not an asset : Not chargeable to tax.

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Reported :

30. Wealth tax : Asset : S.
2(ea) of Wealth-tax Act, 1957 : A.Ys. 1997-98 and 1998-99 : Commercial asset
used by assessee in business of letting out properties : Not an asset : Not
chargeable to tax.

[CIT v. Shankaranarayana
Industries & Plantations (P.) Ltd., 194 Taxman 189 (Kar.)]

The assessee-company had
developed a property into a commercial complex and was deriving rental income
therefrom. Relying on the Finance (No. 2) Act, 1996, the Assessing Officer
charged wealth tax on the said commercial complex for the A.Ys. 1997-98 and
1998-99, on the ground that the property was used for the commercial purposes
and was not excluded from the definition of the term ‘asset’ in S. 2(ea) of the
Wealth-tax Act, 1957. The Commissioner and the Tribunal accepted the claim of
the assessee and held that the assessee is in the business of letting out
properties and accordingly, the commercial complex in question was excluded from
the definition of the word ‘asset’ as is clear from the Circular of the Board.

On appeal by the Revenue,
the Karnataka High Court upheld the decision of the Tribunal. The High Court
considered the amendments to S. 2(ea) of the Act by the Finance (No. 2) Act,
1996 and the Finance (No. 2) Act, 1998. The High Court also considered the
memorandum explaining the Finance (No. 2) Bill, 1996, the CBDT Circular No. 762,
dated 18-2-1998 explaining the provisions of the Finance (No. 2) Act, 1996 and
held as under :

“(i) After the amendment
came into force, the Central Board of Direct Taxes issued Circular No. 762,
dated 18-2-1998, explaining the substantive provisions of the Act relating to
direct taxes. The said amended Section was in force only for two years and by
the Finance Act (No. 2), 1998, the same underwent a radical change, wherein it
is said that any property which is in the nature of commercial building or
complex do not fall within the definition of the word ‘asset’ as defined
u/s. 2(ea) of the Act.

(ii) It is in this
background, the assessee claims that, as the asset in question is the business
asset of the assessee, and as the assessee is in the business of letting out
properties, as is clear from the Explanatory Note appended to the Bill as well
as the Circular issued by the CBDT after passing of the amendment, the asset
which he had let out did not fall within the definition of the word ‘asset’
and therefore, the company is not liable to pay wealth tax.

(iii) The explanatory note
and the CBDT Circular make it very clear that prior to the Finance (No. 2)
Act, 1996, the commercial properties were not included within the definition
of the word ‘asset’. Therefore, it was felt that if residential houses have
been taken as assets, there seems to be no reason why commercial properties
other than those used by the assessee wholly and substantially in the business
or his profession, will also be not taken as assets. Therefore, by an
amendment, commercial buildings which are not occupied by the assessee for the
purposes of his business or profession other than the business of letting out
property, shall be brought to tax under the Wealth-tax Act, 1957.

(iv) Therefore, it is
clear that the intention was to stimulate investment in productive assets.
Therefore, the Parliament thought it fit to abolish the amended Act, excluding
the business assets, i.e., the commercial establishments, which are not
used by the assessee or which are let out, as they are not stimulative
investment. However, as is clear from the aforesaid Explanatory Note, the CBDT
circular and the subsequent action of further amending the said Section, it is
clear that the intention was not to tax business assets used by the assessee
for the purpose of his business or profession and also the business assets
which are let out, if the assessee is in the business of letting out
properties. All other types of commercial properties were brought to tax under
the Wealth-tax Act.

(v) Both the Appellate
Authorities after carefully going to the aforesaid Circulars, amendments,
Explanatory Note and keeping in mind the intention in enacting the Wealth-tax
Act as well as drastic amendment in the year, we are of the opinion that the
assessee was justified in claiming the exclusion of the properties which are
the subject of the matter of the proceedings, from wealth tax. We do not find
any error or illegality in the findings recorded by the Tribunal. Therefore,
no case of interference is made out.”

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Order giving effect to appellate order is inherent in S. 143 and 144 : Not order u/s.154 : Limitation u/s.154(7) not applicable.

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44 Assessment : Limitation : S. 143, S. 144
and S. 154 of Income-tax Act, 1961 : A.Y. 1994-95 : Order giving effect to
Appellate order is order inherent in S. 143 and S. 144 : Not an order u/s.154 :
Limitation u/s.154(7) not applicable.


[Peninsula Land Ltd. v. CIT, 307 ITR 183 (Bom); 175
Taxman 58 (Bom)]

For the A.Y. 1994-95 the AO passed an order u/s.154 of the
Income-tax Act, 1961, on 9-6-2006 giving effect to the order of the Commissioner
(Appeals). In that order he allowed set-off of carried forward depreciation of
the preceding years. Subsequently, he passed another order u/s.154 dated
22-2-2007 withdrawing the earlier order u/s.154, dated 9-6-2006 claiming it to
be beyond the period of limitation as prescribed u/s.154(7). The Commissioner
rejected the revision application made u/s.264 of the Act.

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

“(i) It was clear from the order dated 9-6-2006, that the
set-off was granted in order to pass on to the assessee the benefit that it
had obtained under the order passed by the Appellate authority in the
statutory appeal. This order was not an order passed u/s.154 of the Act. The
power to pass such order was inherent in S. 143 or S. 144.

(ii) The power of the Income-tax Officer to amend the
assessment in consequence of decision in an appeal, revision, reference or by
a High Court or Supreme Court was not traceable to S. 154, but was inherent
and traceable to S. 143 and S. 144 of the Act. Therefore the limitation as
contained in S. 154(7) would not apply to the passing of such an order.

(iii) The finding that the order passed on 9-6-2006 was
beyond the period of limitation as prescribed u/s.154(7) was erroneous.”

 


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TDS : Salary : S. 192 of Income-tax Act, 1961 : A.Ys. 1992-93 to 1998-99 : Assessee was an Indian company engaged in food processing business : Pursuant to a technical collaboration agreement, employees of Japanese company were deputed to India for workin

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Reported :


29. TDS : Salary : S. 192 of
Income-tax Act, 1961 : A.Ys. 1992-93 to 1998-99 : Assessee was an Indian company
engaged in food processing business : Pursuant to a technical collaboration
agreement, employees of Japanese company were deputed to India for working in
assessee-company : Assessee deducted tax at source u/s.192 only on salary and
perks disbursed by it to employees of Japanese company : Assessee not liable to
deduct tax at source in respect of payments made by foreign company to its
employees.

[CIT v. Indo Nissin Food
Ltd., 194 Taxman 144 (Kar.)]

The assessee was an Indian
company engaged in the food processing business. Pursuant to a technical
collaboration agreement entered into between the assessee-company and the
Japanese company, the employees of the Japanese company were deputed to India
considering their expertise in the business and they were working in the
assessee-company during the relevant assessment years. The assessee had deducted
the tax at source u/s.192 based on the salary and perks disbursed by it to the
employees of the Japanese company working with it. The Assessing Officer imposed
penalty u/s.271C of the Income-tax Act, 1961 on the ground that the assessee
company had failed to deduct tax at source in regard to the payments made by the
Japanese company to its employees who were working with the assessee-company.
The Tribunal deleted the penalty holding that the assessee was not liable to
deduct the tax at source in respect of the payments made by the foreign company.

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

(i) It was not in dispute
that the assessee had paid salary to the employees who had been deputed from
the foreign company. S. 192 envisages the assessee to deduct the tax at source
in respect of the payments made by it to the employees. Therefore, the
assessee was required to deduct income-tax at source on the amount payable or
paid by it to its employees.

(ii) There was no record
to show that the amount paid by the foreign company to its employees was made
known to the assessee or the said amount was also disbursed to the employees
of the foreign company through the assessee. Therefore, it was not possible to
accept the arguments advanced by the Revenue, as S. 192 does not deal with
such cases. In the circumstances, when the payment was not made by the
assessee or the amount was not paid by a foreign company through the assessee,
the assessee was not required to deduct the tax at source u/s.192(1).

(iii) When there was no
violation of S. 192(1), the question of initiating the proceedings u/s.271C
did not arise.”

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S. 27 — Notice by Speed Post is deemed to have been served by ordinary post within 2-3 days, further absence of assessee

New Page 2

II. Reported : 



53 Notice : Service by Speed Post : Notice
u/s.143(2) dispatched by Speed Post and not received back is deemed to have been
served in the ordinary course of post within 2/3 days by virtue of presumption
u/s.27 of General Clauses Act, 1897, in the absence of any rebuttal on the side
of the assessee.

[CIT v. Madhsy Films (P) Ltd., 301 ITR 69 (Del.); 216
CTR 145 (Del.)]

Pursuant to the return of income filed by the assessee on
31-10-2001, the Assessing Officer issued notice u/s.143(2) of the Income-tax
Act, 1961, on 23-10-2002 fixing the date of hearing on 29-10-2002 and sent by
Speed Post and completed the assessment after issuing further notices. The
assessee challenged the validity of the assessment order, on the ground that the
notice u/s.143(2) of the Act was not served on the assessee within the
prescribed period. The Tribunal allowed the assessee’s claim and quashed the
assessment order.

 

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

“(i) In the present case, the notice has been issued on
23-10-2002 and was sent through Speed Post on 25-10-2002 at the address of the
company. S. 27 of the General Clauses Act, 1897 provides that service by post
is deemed to have been effected by properly addressing, pre-paying and posting
by registered post, a letter containing a notice required to be served. Unless
the contrary is proved, the service is deemed to have been effected at the
time when the letter would be delivered in the ordinary course of post. This
presumption is rebuttable, but in the absence of proof to the contrary, the
presumption of proper service or effective service of notice would arise.

(ii) There is nothing on record to show that the notice
dated 23-10-2002 dispatched on 25-10-2002 by Speed Post was undelivered or
received back. Under the normal circumstances, a presumption will lie that
this notice has reached the assessee within 2/3 days. Since the envelop
containing the notice has not been received back by the Department, there is a
presumption that it has reached the assessee and this presumption has not been
rebutted by the assessee at all. No affidavit has been filed by the assessee
to the effect that the notice was not received by it.

(iii) Under the circumstances, notice u/s.143(2) was served
upon the assessee within the prescribed period and as such the finding given by
the Tribunal that no notice u/s.143(2) has been served upon the assessee within
the prescribed period is hereby set aside and the substantial question of law is
decided in the negative in favour of the Revenue and against the assessee.”

Revision : S. 263 of Income-tax Act, 1961 : A.Ys. 2001-02 and 2002-03 : Where AO adopts one of courses permissible in law or where two views are possible and AO takes one of possible views, Commissioner cannot exercise his powers u/s.263 to differ with vi

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Reported :


28. Revision : S. 263 of
Income-tax Act, 1961 : A.Ys. 2001-02 and 2002-03 : Where AO adopts one of
courses permissible in law or where two views are possible and AO takes one of
possible views, Commissioner cannot exercise his powers u/s.263 to differ with
view of AO even if there has been a loss of revenue: When a regular assessment
is made u/s.143(3), a presumption can be raised that order has been passed upon
application of mind and, though this presumption is rebuttable, yet there must
be some material to indicate that AO had not applied his mind to invoke
provisions of S. 263 : Validity of an order u/s.263 has to be tested with regard
to position of law as it exists on the date of the order.

[CIT v. Honda Seil Power
Products Ltd., 194 Taxman 175 (Del.)]

For the A.Ys. 2001-02 and
2002-03, assessment was completed u/s.143(3) of the Income-tax Act, 1961
allowing the claim for deduction u/s.80HHC and u/s.80-IB. The Commissioner
invoked the provisions of 263, on the ground that the Assessing Officer had not
applied the provisions of S. 80-IB(13)/80-IA(9) and had wrongly calculated the
deduction u/s.80HHC. The Commissioner, therefore, directed the Assessing Officer
to recalculate the allowable deduction u/s.80HHC. The Tribunal held that the
Assessing Officer had taken one of the possible views prevailing at the relevant
point of time and, therefore, his action could not be said to be ‘erroneous and
prejudicial to the interests of the Revenue’. Accordingly, 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) In cases where the
Assessing Officer adopts one of the courses permissible, in law, or where two
views are possible and the Assessing Officer has taken one of the possible
views, the Commissioner cannot exercise his powers u/s.263 to differ with the
view of the Assessing Officer, even if there has been a loss of revenue.


(ii) It is also clear that
while passing an order u/s.263, the Commissioner has to examine not only the
assessment order, but also the entire record. Since the assessee has no
control over the way an assessment order is drafted and since generally the
issues which are accepted by the Assessing Officer, do not find mention in the
assessment order and only those points are taken note of on which the
assessee’s explanations are rejected and additions/disallowances are made, in
the instant case, the mere absence of the discussion of the provisions of S.
80-IB(13), r/w. S. 80-IA(9), would not mean that the Assessing Officer had not
applied his mind to the said provisions.


(iii) When a regular
assessment is made u/s. 143(3), a presumption can be raised that the order has
been passed upon an application of mind. No doubt, this presumption is
rebuttable, but there must be some material to indicate that the Assessing
Officer had not applied his mind.


(iv) In the instant case,
there was no material
to indicate that the Assessing Officer had not applied his mind to the
provisions of
S. 80-IB(13), r/w. S. 80-IA(9). The presumption, that the assessment order
passed u/s.143(3) by the Assessing Officer had been passed upon an application
of mind, had not been rebutted by the Revenue. No additional facts were
necessary before the Assessing Officer for the purpose of construing the
provisions of S. 80-IB(13), r/w S. 80-IA(9). It was only a legal consideration
as to whether the deduction u/s.80HHC was to be computed after reducing the
amount of deduction u/s.80-IB from the profits and gains.


(v) There was no doubt
that the Assessing Officer had allowed the deduction u/s.80HHC without
reducing the amount of deduction allowed u/s.80-IB from the profits and gains.
He did not say so in so many words, but that was the end result of his
assessment order. It could not be said that the Assessing Officer had failed
to make any enquiry because no further enquiry was necessary and all the facts
were before the Assessing Officer.


(vi) The validity of an
order u/s.263 has to be tested with regard to the position of law as it exists
on the date on which such an order is made by the Commissioner. From the
narration of the facts in the Tribunal’s order, it was clear that on the date
when the Commissioner had passed his order u/s.263, the view taken by the
Assessing Officer was in consonance with the view taken by the several Benches
of the Tribunal. Therefore, the conclusion of the Tribunal, that the
Commissioner could not have invoked his jurisdiction u/s.263, was correct. As
a result, the Tribunal was correct, in law, in cancelling the order passed by
the Commissioner u/s.263.”

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Penalty : Ss. 44AB and 271B of I. T. Act, 1961 : A. Y. 1992 – 93 : Provisions of s. 44AB not complied with on the basis of legal opinion contained in Tax Audit Manual published by the Bombay Chartered Accounts’ Society : Reasonable cause for default : Pen

New Page 1

40. Penalty : Ss. 44AB and 271B of I. T. Act, 1961 : A. Y.
1992 – 93 : Provisions of s. 44AB not complied with on the basis of legal
opinion contained in Tax Audit Manual published by the Bombay Chartered
Accounts’ Society :  Reasonable cause for default : Penalty u/s. 271B not
justified.

[ITO vs. Sachinum Trust, 223 CTR 152 (Guj.)]

For the A. Y. 1992 – 93, the assessee trust did not get its
accounts audited under the provisions of Section 44AB of the Income-tax Act,
1961, on the basis of the legal opinion contained in the Tax Audit Manual
published by the Bombay Chartered Accountants’ Society. The Assessing Officer
was of the view that the assessee was under an obligation to get its accounts
audited u/s. 44AB of the Act. He therefore, imposed penalty u/s. 271B of the
Act. The Tribunal cancelled the penalty.


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


“Legal opinion contained in Tax Audit Manual published by
the Bombay Chartered Accountants’ Society constituted reasonable cause for the
bona fide belief of the assessee that its interest receipts i.e.,
gross receipts, and not loan advanced i.e., turnover, being less than
Rs. 40 laks, the provisions of s. 44AB are not applicable in its case and,
therefore, penalty u/s. 271B is not leviable.”



 


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TDS : Ss. 194A, 201(1) and 201(1A) of I. T. Act 1961 : A. Y. 2000 – 01 : Assessee in default : Interest u/s. 201(1A) : Assessee, insurance co. failed to deduct tax at source on interest on compensation to the victims of motor vehicle accidents : Assessee

New Page 1

41. TDS : Ss. 194A, 201(1) and 201(1A) of I. T. Act 1961 : A.
Y. 2000 – 01 : Assessee in default : Interest u/s. 201(1A) : Assessee, insurance
co. failed to deduct tax at source on interest on compensation to the victims of
motor vehicle accidents : Assessee liable to TDS and interest : Revenue directed
to collect tax from recipient of interest and refund the amount of TDS to the
assessee.

[CIT vs. Oriental Insurance Co. Ltd., 223 CTR 102 (Kar.)]

Pursuant to the order made under the Motor Vehicles Act,
the respondent insurance company paid compensation to the victims of motor
vehicle accidents. The award amount consisted of the compensation and interest
liability. The Assessing Officer held that the respondent assessee has failed
to deduct tax at source u/s. 194A of the Income-tax Act, 1961 and directed the
assessee company to deposit the TDS amount and interest on the TDS amount. The
Tribunal permitted the assessee to split the interest liability for the
respective assessment years and set aside the order for payment of interest
u/s. 201(1A) of the Act.


On appeal by the Revenue, the Karnataka High Court held as
under :


“i) Levy of interest u/s. 201(1A) cannot at any rate be
construed as penalty. In that view, the contrary finding of the Tribunal is
set aside.

ii) The Tribunal has rightly directed that the interest
paid above Rs. 50,000 is to be split and spread over the period from the
date interest is directed to be paid till its payment. If the spread over is
given, in majority of cases, the respondent may not incur liability to pay
any TDS.


iii) In the event, the respondent remits TDS amount as
directed by the Tribunal, the Revenue is directed to hold suo moto
enquiry by issuing notices to the persons who have received compensation to
find out their tax liability on the interest received. If it is found that
there is a tax liability on the person concerned, the Revenue should collect
the tax from the person concerned and refund the amount to the respondent. So
also, if there is no tax liability on the person concerned, the TDS collected
should be refunded to the respondent, of course, with interest in either
case.”

 

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Depreciation : Option to claim : Deduction under Chapter VI-A of I. T. Act, 1961 : A. Y. 1997 – 98 : Assessee did not claim depre-ciation for computing gross total income : Whether for the purposes of availing deduction under Chapter VI-A, gross total inc

New Page 1

In the High Court

K. B. Bhujle
Advocate

38. Depreciation : Option to claim : Deduction under Chapter
VI-A of I. T. Act, 1961 : A. Y. 1997 – 98 : Assessee did not claim depre-ciation
for computing gross total income :  Whether for the purposes of availing
deduction under Chapter VI-A, gross total income is required to be computed by
deducting allowable depreciation ?  : Question referred to larger Bench.

[Plastiblends India Ltd. vs. Add. CIT, 223 CTR 291 (Bom.)]

In view of the contrary decisions in the case of Grasim
Industries Ltd. vs. ACIT 245 ITR 677 (Bom) and Scoop Industries (P)
Ltd. vs. ITO 289 ITR 195 (Bom) the following question has been referred
to the Larger Bench :

"Whether for the purposes of availing allowable special
deduction under Chapter VI-A, the gross total income is required to be
computed by deducting allowable depreciation even though the assessee has
disclaimed the same for the purposes of regular assessment ? ".

 

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Investment allowance : S. 32A of I. T. Act, 1961 : A. Y. 1991 – 92 : Purchase of plant and machinery in earlier years : Reserve account not created in earlier years in view of loss : Reserve account created and investment allowance claimed in the A. Y. 19

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39. Investment allowance : S. 32A of I. T. Act, 1961 : A. Y.
1991 – 92 : Purchase of plant and machinery in earlier years : Reserve account
not created in earlier years in view of loss : Reserve account created and
investment allowance claimed in the A. Y. 1991 – 92 : Assessee entitled to
investment allowance.

[Velan Textiles Pvt. Ltd., 312 ITR 56 (Karn.)]

For the A. Ys. 1985 – 86 to 1987 – 88 the assessee could
not claim investment allowance on account of the loss incurred in those years.
Accordingly, the assessee did not create reserve account in those years. For
the A. Y. 1991 – 92 the assessee filed the return of income disclosing income
of Rs. 39,78,083. In this year the assessee created the reserve account and
claimed investment allowance of Rs. 11,02,807 relating to A. Ys. 1985 – 86 to
1987 – 88. The Assessing Officer disallowed the claim. The Tribunal upheld the
disallowance and held that the claim for investment allowance had to be made
during the relevant assessment year and not when the assessee had adequate
funds for creation of the reserve.


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


“i) The purpose of the amendment to clause (ii) of
sub-Section (4) of Section 32A of the Income-tax Act, 1961, as brought about
by the Finance Act, 1990, retrospectively from 01/04/1976, is to enable the
assessee to create a reserve in any of the years between the year of
installation of plant and machinery and the year of actual deduction.
Consequently, the assessee need not create a reserve in the year of
installation. If there is no sufficient profit, the assessee can create it
in the year of actual deduction.

ii) It remained undisputed by the Department that the
assessee incurred losses in the A.Ys. 1985-86 to 1987-88. The question of
creating reserve account did not arise since it incurred loss during the A.
Ys. 1985 – 86 to 1987 – 88. Therefore, the Tribunal’s order was to be
quashed.”

 

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Capital gain/loss : Ss. 2(47) and 45 of I. T. Act, 1961 : A. Y. 1998 – 99 : Application for shares : Assessee failed to pay balance amount on allotment of shares : Forfeiture of share application money : Assessee’s right in shares extinguished : Loss on f

New Page 1

36. Capital gain/loss : Ss. 2(47) and 45 of I. T. Act,
1961 : A. Y. 1998 – 99 : Application for shares : Assessee failed to pay balance
amount on allotment of shares : Forfeiture of share application money : Assessee’s
right in shares extinguished : Loss on forfeiture is short-term capital loss.

[Dy. CIT vs. BPL Sanyo Finance Ltd., 312 ITR 63 (Karn) : 223
CTR 461 (Karn.)]

The assessee company had applied for the shares of IDBI and
had remitted the share application money. IDBI allotted 89,200 shares to the
assessee and called upon the assessee to pay the balance sum for issuance of
shares in its favour. The assessee failed to remit the balance outstanding
allotment money. Therefore, the IDBI cancelled the allotment and forfeited the
share application money. In the return of income for the A. Y. 1998 – 99, the
assessee claimed the forfeited amount as short-term capital loss. The
Assessing Officer disallowed the claim. The Tribunal allowed the assessee’s
claim.

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

“Consequent to the assessee’s default of not paying the
balance of money on allotment, its rights in the shares stood extinguished on
forfeiture by IDBI. The loss suffered by the assessee, i.e., the
non-recovery of the share application money was consequent to the forfeiture
of its rights in the shares and was to be understood to be within the scope
and ambit of transfer. The Tribunal was justified in holding that it would
amount to short-term capital loss to the assessee.”

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Compounding of offences : S. 279(2) of I. T. Act, 1961 : Offences can be compounded during the pendency of appeal.

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37. Compounding of offences : S. 279(2) of I. T. Act,
1961 : Offences can be compounded during the pendency of appeal.

[Chairman CBDT vs. Smt. Umayal Ramanathan, 313 ITR
59 (Mad.)]

Against the conviction and sentence order passed by the
Trial Court, the respondent filed a petition u/s. 279(2) of the Income-tax
Act, 1961 seeking compounding of the offences u/s. 278 of the Act and Sections
120B, 420 read with Section 109 of the Indian Penal Code, 1860. The Joint
Director of Income-tax refused to compound the offences on the ground that the
respondent had been convicted by the Trial Court. The Single Judge set aside
the order passed by the Joint Director of Income-tax stating that the refusal
to compound the offence on the sole ground that the Criminal Court had
convicted her was discriminatory and that in the case of a similarly placed
assessee the appellants had compounded the offence.

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

“i) The appeal against the order of conviction and
sentence passed by the Trial Court was a prescribed course of action for
enforcing a legal right. The appellants could have compounded the offence
sought for by the respondent during the pendency of the appeal.

ii) The Single Judge had rightly set aside the order
passed by the Joint Director of Income-tax. The respondent was permitted to
pay the amount demanded by the appellants for compounding the offence.”

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S. 143(2) — Service of notice by Speed Post, in absence of material on record, no pre-sumption of service within 24 hours

New Page 2

II. Reported :






 



52 Notice : Service by Speed Post : No
presumption of service within 24 hours : Notice u/s.143(2) dated 29-10-2002 sent
by Speed Post on 30-10-2002 at Delhi address given in the return and redirected
and served at Noida address of assessee on 6-11-2002 : No presumption that the
notice was served at the former address on or before 31-10-2002 in the absence
of material on record.

[Nulon India Ltd v. ITO, 216 CTR 142 (Del.)]

Pursuant to the return of income filed by the assessee on
31-10-2001, the Assessing Officer issued notice u/s.143(2) of the Income-tax
Act, 1961 on 29-10-2002, which was sent through Speed Post on 30-10-2002 at
Delhi address mentioned in the return. The notice was redirected and was served
at the Noida address of the assessee on 6-11-2002. The assessee challenged the
validity of the assessment order passed pursuant to the said notice, on the
ground that the notice was not served within the prescribed period. The Tribunal
rejected the assessee’s claim.

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

“(i) As per material placed on record, the notice in
question has been dispatched on 30-10-2002 and thereafter it has been
redirected to the Noida address of the assessee. There is nothing on record to
show as to on which date this notice was received at the given address of the
assessee and on which date the same was redirected. As per the order of the
CIT(A) placed on record, the Assessing Officer was asked for comments and vide
his letter dated 12/20th October, 2004, the Assessing Officer stated : “The
notice was served by Speed Post which must be delivered to the assessee within
24 hours, that is, by morning of 31st October.” So the AO is also not sure nor
specific as to when the notice in question has been served upon the assessee.
It is only a presumption that notice which has been sent by Speed Post on 30th
October 2002, must have been delivered to the assessee by 31st October 2002.

(ii) There is no presumption under law that any notice sent
by Speed Post must have been delivered to the assessee within 24 hours.
Moreover, there is nothing on record to show at whose instance the notice was
redirected and sent at the address of Noida. So, from the material available
on record, it may be concluded that no notice u/s.143(2), which is mandatory
requirement of law, has been served upon the assessee within prescribed
period.

(iii) Under the circumstances, the appeal filed by the
assessee is allowed and the impugned order passed by the Tribunal is set
aside.”

Capital gain : Capital asset : Agricultural land : S. 2(14) of I. T. Act, 1961 : Purchase of agricultural land in 1989 to set up industry : Shortly thereafter, land acquired by Government : AO treated land as capital asset and assessed capital gain : Not

New Page 1

35. Capital gain : Capital asset : Agricultural land : S.
2(14) of I. T. Act, 1961 : Purchase of agricultural land in 1989 to set up
industry :  Shortly thereafter, land acquired by Government :  AO treated land
as capital asset and assessed capital gain : Not justified.

[Hindustan Industrial Resources Ltd vs. ACIT, 180
Taxman 114 (Del.)]

The assessee had purchased an agricultural land in 1989
with an object of setting up an industry. Shortly thereafter it was acquired
under the Land Acquisition Act, 1894 and compensation was paid to the assessee
by the Government. The assessee claimed that the land was an agricultural land
and therefore, no taxable capital gain accrued. The Assessing Officer assessed
the capital gains to tax, holding that land ceased to be agricultural land
when the assessee purchased it from the agriculturist for setting up an
industry. 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 Tribunal’s finding of fact was contrary to its
own record and, therefore, was in the realm of perversity. That was so,
because the Tribunal clearly held that at the point of time when the
assessee purchased the said land, it was an agricultural land. The Tribunal
also noted that the award passed on 01.04.1992 by the District Collector
(Land Acquisition) was a document which established beyond doubt that the
land in question was an agricultural land. Thus on the date of purchase, the
land in question was an agricultural land and on the date of acquisition,
the character of the land continued to be agricultural. When those two
findings had been returned, it was apparent that in the transitional period,
that was, between purchase and acquisition, the nature and character of the
land did not change.

ii) The fact that the assessee intended to use that land
for industrial purposes did not alter the nature and character of the land
in any way. The further fact that the assessee did not carry out any
agricultural operations also did not result in conversion of the
agricultural land into an industrial land. It was nobody’s case that the
assessee carried out any operations for setting up any plant and machinery
or of the like nature so as to lead to an inference that the nature and
character of the land had been changed from agricultural to industrial.

iii) In any event, that discussion was not relevant in
the backdrop of the clear finding given by the Tribunal that on the date of
the purchase and also on the date of acquisition, the land in question was
an agricultural land. Having come to such a conclusion, the Tribunal ought
not to have gone into the question of intention of the assessee and
definitely not into the question of intention of the land acquiring
authority, the later being a wholly irrelevant consideration.

iv) In those circumstances, the Tribunal was not
justified in holding that the land acquired from the ownership of the
assessee was not an agricultural land. The impugned order passed by the
Tribunal was to be set aside.”

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Free Trade Zone : Deduction u/s.10A of Income-tax Act, 1961 : A.Y. 2003-04 : Total turnover to exclude freight and insurance : Deduction allowable on foreign exchange gain : Deduction allowable on enhanced profit on account of disallowance of PF/ESIC.

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Unreported
 


39 Free Trade Zone : Deduction u/s.10A of Income-tax Act,
1961 : A.Y. 2003-04 : Total turnover to exclude freight and insurance :
Deduction allowable on foreign exchange gain : Deduction allowable on enhanced
profit on account of disallowance of PF/ESIC.


[CIT v. Gem Plus Jewellery India Ltd. (Bom.); ITA No.
2426 of 2009 dated 23-6-2010]

The following questions were raised in the appeal filed by
the Revenue :

“(a) Whether on the facts and in the circumstances of the
case, the Tribunal was justified in holding that the exemption u/s.10A of the
Act should be computed after excluding freight and insurance from the total
turnover ?

(b) Whether on the facts and in the circumstances of the
case, the Tribunal was justified in directing the Assessing Officer to grant
exemption u/s.10A on foreign exchange gain earned on realisation of export
receipts in the year of export and to exclude the gains on sales of earlier
years from the profits of the year under consideration and allow in those
years ?

(c) Whether on the facts and in the circumstances of the
case, the Tribunal was justified in directing the Assessing Officer to grant
the exemption u/s.10A of the Act on the assessed income, which was enhanced
due to disallowance of employer’s as well as employees’ contribution towards
PF/ESIC ?”

The Bombay High Court upheld the decision of the Tribunal,
answered the questions in favour of the assessee and held as under :

“(a-i) Ss.(4) of S. 10A provides the manner in which the
profits derived from the export shall be computed. U/ss.(4), the profits of
the business of the undertaking are multiplied by the export turnover and
divided by the total turnover of the business carried on by the undertaking.
Total turnover of the business would consist of the turnover from export and
the turnover from local sales.

(a-ii) In Explanation (2) to S. 10A, the expression ‘export
turnover’ is defined to mean the consideration in respect of export of
articles, etc., received in or brought into India by the assessee in
convertible foreign exchange but so as not to include inter alia freight and
insurance. Therefore in computing the export turnover, the Legislature has
made a specific exclusion of freight and insurance charges.

(a-iii) The export turnover in the numerator must have the
same meaning as the export turnover which is a constituent element of total
turnover in the denominator. Freight and insurance do not have an element of
turnover. These two items would have to be excluded from the total turnover.

(b-i) The Tribunal has followed a decision of its Special
Bench in coming to the conclusion that foreign exchange earned on the
realisation of export receipts in a year other than the year in which the
goods were exported would have to be considered in the year of export for the
for the purposes of exemption u/s.80HHC. The Tribunal has, however, directed
the Assessing Officer, while granting a deduction to the assessee u/s.10A in
the export to exclude the amount from the profits of the year under
consideration simultaneously. This is to ensure that the assessee does not
obtain a deduction twice over.

(b-ii) It has not been disputed on behalf of the Revenue
that the foreign exchange was realised by the assessee within the period
stipulated in law. The assessee realised a larger amount because of a foreign
exchange fluctuation. The fact that this forms part of the sale proceeds would
have to be accepted in view of the judgment of the Division Bench of this
Court in CIT v. Umber Export India, (ITA 1249 of 2007 decided on 18-2-2009).

(biii) In the present case, the assessee has realised a
larger amount in terms of Indian Rupees as a result of a foreign exchange
fluctuation that took place in the course of the export transaction.

(b-iv) For the aforesaid reasons, the question of law is
answered against the Revenue and in favour of the assesee.

(c-i) The assessed income was enhanced due to the
disallowance of the employer’s as well as employees’ contribution towards PF/ESIC
and the only question which is canvassed on behalf of the Revenue is whether
on that basis the Tribunal was justified in directing the Assessing Officer to
grant the exemption u/s.10A.

(c-ii) On this position, in the present case it can-not be
disputed that the net consequence of the disallowance of the employer’s and
the employees’ contribution is that the business profits have to that extent
been enhanced. There was an add back by the Assessing Officer to the income.
All profits of the unit of the assessee have been derived from manufacturing
activity. The salaries paid by the assessee relate to the manufacturing
activity. The disallowance of the PF/ESIC payments has been made because of
the statutory provisions. The plain consequence of the disallowance and the
add back that has been made by the Assessing Officer is an increase in the
business profits of the assessee.

(c-iii) The contention of the Revenue that in computing the
deduction u/s.10A the addition made on account of the disallowance of PF/ESIC
payments ought to be ignored cannot be accepted. No statutory provision to
that effect having been made, the plain consequence of the disallowance made
by the Assessing Officer must follow. The question shall accordingly stand
answered against the Revenue and in favour of the assessee.”
 

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Appellate Tribunal : Powers and duty : A.Y. 1997-98 : Order passed relying on decision not cited in the course of arguments : Assessee to be given opportunity to deal with distinguishable features of case relied on : Matter remanded.

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Reported :

40 Appellate Tribunal : Powers and duty : A.Y. 1997-98 :
Order passed relying on decision not cited in the course of arguments : Assessee
to be given opportunity to deal with distinguishable features of case relied on
: Matter remanded.


[Inventure Growth and Securities Ltd. v. ITAT; 324 ITR
319 (Bom.)]

In respect of the A.Y. 1997-98, the Tribunal decided an
appeal relying on the decision of the co-ordinate Bench which was not relied on
by either parties. The assessee therefore, filed a miscellaneous application
u/s.254(2) of the Income-tax Act, 1961 on the ground that the Tribunal, while
relying on the decision of the co-ordinate Bench, had not furnished an
opportunity to the assessee to deal with the decision which had not been cited
by either side when arguments were heard. The application was dismissed.

On writ petition filed by the assessee the Bombay High Court
set aside the order of the Tribunal and held as under :

“(i) It could not be laid down as an inflexible provision
of law that an order of remand on a miscellaneous application u/s.254(2) would
be warranted merely because the Tribunal had relied upon a judgment which was
not cited by either party before it. In each case, it was for the Court to
consider as to whether a prima facie or arguable distinction had been made and
which should have been considered by the Tribunal.

(ii) The distinguishing features in the case of Khandwala
Finace Ltd., which had been pointed out by the assessee were sufficient to
hold that an opportunity should be granted to the petitioner to place its case
on the applicability or otherwise of the decision in Khandwala Finance Ltd.
before the Tribunal. Therefore the appeal and the cross-objections were to be
restored for fresh consideration on the merits before the Tribunal.”

 

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Export profit : Deduction u/s.80HHC of Income-tax Act, 1961 : A.Y. 2000-01 : Profits of business : Expl. (baa) : Insurance claim relating to stock-in-trade not to be excluded.

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Unreported :


38 Export profit : Deduction u/s.80HHC of Income-tax Act,
1961 : A.Y. 2000-01 : Profits of business : Expl. (baa) : Insurance claim
relating to stock-in-trade not to be excluded.


[CIT v. The Pfizer Ltd. (Bom.); ITAL No. 128 of 2009
dated 18-6-2010]

The assessee is engaged in the manufacture and export of
pharmaceuticals and animal health products. For the A.Y. 2000-01, while
computing deduction u/s.80HHC, the Assessing Officer excluded 90% of the amount
of insurance claim which was related to the stock-in-trade of the assessee. The
Tribunal held that the insurance claim formed part of the income of the business
of the assesee and was liable to be considered as part of the profits of the
business in view of Explanation (baa) to S. 80HHC. The Tribunal was of the view
that the insurance claim was not in the nature of brokerage, commission,
interest, rent or charges and therefore was not any other receipt of a similar
nature within the meaning of Explanation (baa). The Tribunal, therefore, held
that 90% of the insurance claim could not be excluded.

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

“(i) Receipts by way of brokerage, commission, interest,
rent or charges in Explanation (baa) have been held, by the judgment of the
Supreme Court in CIT v. K. Ravindranathan Nair; 295 ITR 228 (SC), to
constitute independent incomes. Being independent incomes unrelated to export,
the Parliament contemplated that 90% of such receipts would have to be reduced
from the profits of business as defined in Explanation (baa).

(ii) The rationale for excluding 90% of the receipts by way
of brokerage, commission, interest, rent or charges is that these are
independent incomes and their inclusion in the profits of business would
result in a distortion. In determining whether any other receipt is liable to
undergo a reduction of 90%, the basic prescription which must be borne in mind
is whether the receipt is of a similar nature and is included in the profits
of business. To be susceptible of a reduction the receipt must be of a nature
similar to brokerage, commission, interest, rent or charges.

(iii) In the present case, the insurance claim, it must be
clarified, is related to the stock-in trade and it is only an insurance claim
of that nature which forms the subject matter of the appeal. Now it cannot be
disputed that if the stock-in-trade of the assessee were to be sold, the
income that was received from the sale of goods would constitute the profits
of the business as computed under the head profits and gains of business or
profession. The income emanating from the sale would not be sustainable to a
reduction of 90% for the simple reason that it would not constitute a receipt
of a nature similar to brokerage, commission, interest, rent or charges.

(iv) A contract of insurance is a contract of indemnity.
The insurance claim in essence indemnifies the assessee for the loss of the
stock-in-trade. The indemnification that is made to the assessee must stand on
the same footing as the income that would have been realised by the assessee
on the sale of the stock in trade.

(v) In these circumstances, we are clearly of the view that
the insurance claim on account of the stock-in-trade does not constitute an
independent income or a receipt of a nature similar to brokerage, commission,
interest, rent or charges. Hence, such a receipt would not be subject to a
deduction of 90% under clause (1) of Explanation (baa).”
 

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Deduction u/s.80RR of Income-tax Act, 1961 : A.Ys. 1999-00 to 2001-02 : Dress designer is artist entitled to deduction u/s. 80RR.

New Page 1

 Unreported :

36 Deduction u/s.80RR of Income-tax Act, 1961 : A.Ys. 1999-00
to 2001-02 : Dress designer is artist entitled to deduction u/s. 80RR.

[CIT v. Tarun R. Tahiliani (Bom.); dated 14-6-2010]

The assesse is a dress designer. For the A.Ys. 1999-00 to
2001-02 the assessee claimed deduction u/s.80RR of the Income-tax Act, 1961 in
respect of the design fees received from persons not resident in India in
convertible foreign exchange. The Assessing Officer rejected the claim holding
that the assessee is not an author, or a playwright, artist, musician, actor or
a sportsman, and hence did not fall within one of the categories to whom a
deduction can be allowed. 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) Counsel appearing on behalf of the Revenue submitted
that (i) The expression ‘artist’ in S. 80RR must be restricted to the field of
fine arts; (ii) The purpose of the provision is to showcase Indian culture
abroad; and (iii) The field of design is an area of technical expertise and
not an art form.

(ii) In a circular (No. 31) of the Board dated 25-10-1969,
it was clarified that the expression artist includes photographers and T.V.
cameramen for S. 80RR. By circular (No. 675) dated 3-1-1994, the Board
clarified that a script writer is a playwright and that a director is an
artist for the purpose of S. 80RR. However, a producer does not fall in any of
the stated categories.

(iii) The expression ‘artist’ is not defined by the
statute. Hence, the Parliament must have intended that an artist must be
understood in its ordinary sense. No artificial constructs or deeming
fictions. There is nothing in the statutory provision which would confine the
meaning of the expression to a person
engaged in fine arts.

(iv) Simply stated, an artist is a person who engages in an
activity which is an art. Artist, as we understand them, use skill and
imagination in the creation of aesthetic objects and experience. Drawing,
painting, sculpture, acting, dancing, writing, film-making, photography and
music all involve imagination, talent and skill in the creation of works which
have an aesthetic value. A designer uses the process of design and her work
requires a distinct and significant element of creativity. The canvass of
design is diverse and includes graphic design and fashion design. An artist as
part of his or her creative work, seeks to arrange elements in a manner that
would affect human senses and emotions. Design, in a certain sense, can be
construed to be a rigorous form of art or art which has a clearly defined
purpose. Though the field of designing may be regarded as a rigorous facet of
art, creativity, imagination and visualisation are the core of design.

(v) Dress designing has assumed significance in the age in
which we live, influenced as it is by the media and entertainment. As a dress
designer, the assessee must bring to his work a high degree of imagination,
creativity and skill. The fact that designing involves skill and even
technical expertise does not detract from the fact that the designer must
visualise and imagine. A designer is an artist.

(vi) The Tribunal was not in error in holding that the
assessee is an artist for the purposes of S. 80RR.”

 

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Export profit : S. 80HHC of Income-tax Act, 1961 : In computing the amount deductible u/s.80HHC(3)(b) freight and insurance is not to be included in the direct cost.

New Page 1

Unreported :


37 Export profit : S. 80HHC of Income-tax Act, 1961 : In
computing the amount deductible u/s.80HHC(3)(b) freight and insurance is not to
be included in the direct cost.


[CIT v. King Metal Works (Bom.); ITA(L) No. 801 of 2010,
dated 7-7-2010]

In this case, the following question was raised before the
Bombay High Court :

“Whether on the facts and in the circumstances of the case
and in law, the Tribunal has erred in holding that while computing direct cost
attributable to export, the freight and insurance amounting to Rs.1,71,87,614
should be excluded for arriving at export profits while computing the
deduction u/s.80HHC ?”

The High Court answered the question in favour of the
assessee and held as under :

“(i) U/s.80HHC(3)(b), the export turnover has to be reduced
by the direct and indirect cost attributable to export in order to arrive at
profits derived from export.

(ii) While defining the expression ‘export turnover’, the
Parliament has evinced an intent to exclude freight and insurance attributable
to the transport of goods or merchandise beyond the customs station. Such
freight and insurance has to be excluded from the sale proceeds received in
India by the assessee in convertible foreign exchange. The object of the
exclusion of freight and insurance is to ensure that the benefit of the
deduction u/s.80HHC is confined to profits derived from export.

(iii) The case of the Revenue is that though freight and
insurance is excluded from the export turnover as a result of Explanation (b)
to Ss.(4C) of the Section, freight and insurance must be treated as direct
cost and must then be deducted from the export turnover. According to the
Revenue, freight and insurance would be ‘cost directly attributable to the
trading goods exported out of India’ within the meaning of Explanation (d) to
Ss.(3).

(iv) In considering the tenability of the submission which
has been urged on behalf of the Revenue, it has to be noted that for the
purposes of the formula in clause (b) of Ss.(3), the export turnover has to be
reduced by direct and indirect cost attributable to export. Freight and
insurance is expressly to be excluded from the sale proceeds received by the
assessee, in computing the export turnover. Freight and insurance cannot be
regarded as costs directly attributable to the trading goods within the
meaning of clause (b) of Explanation to Ss.(3).

(v) As a matter of fact, freight and insurance attributable
to the transport of goods or merchandise beyond the customs station is already
excluded from the sale proceeds in computing the export turnover. Such freight
and insurance cannot be regarded as part of the direct costs attributable to the
trading goods. To do so, would result in a situation where freight and insurance
attributable to the transport of the goods beyond the customs station, which has
already been reduced from the sale proceeds received by the assessee, would, in
addition, be added back as a part of the direct cost incurred by the assessee.
The language of the Section, in our view, does not warrant such a conclusion.”

 

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S. 133A and S. 132(4) : Statement in survey operation offering income : Not conclusive : Subsequent retraction of statement : Amount offered not assessable as income

New Page 2

44 Survey : Statement : Difference between
S. 133A and S. 132(4) of Income-tax Act, 1961 : A.Y. 2001-02 : Statement in
survey operation offering income : Not conclusive : Subsequent retraction of
statement : Amount offered not assessable as income.


[CIT v. S. Khader Khan Son, 300 ITR 157 (Mad.)]

In the course of survey operation, a partner of the assessee-firm
made a statement offering additional income of Rs.20 lakhs. The said statement
was retracted by a letter dated 3-8-2001, stating that the partner from whom a
statement was recorded was new to the management and he could not answer the
enquiries made and as such, he agreed to an ad hoc addition. The Assessing Officer made the addition
on the basis of the statement. The Tribunal deleted the addition.

 

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

“(i) The principles relating to S. 133A of the Income-tax
Act, 1961 are as follows : (i) an admission is an extremely important piece of
evidence, but it cannot be said that it is conclusive and it is open to the
person who made the admission to show that it is incorrect. And that the
assessee should be given a proper opportunity to show that the books of
account do not correctly disclose the correct state of facts; (ii) in
contradistinction to the power u/s.133A, S. 132(4) enables the authorised
officer to examine a person on oath and any statement made by such person
during such examination can also be used in evidence under the Act. On the
other hand, whatever statement is recorded u/s.133A is not given any
evidentiary value, obviously for the reason that the officer is not authorised
to administer oath and to take any sworn statement which alone has evidentiary
value as contemplated under law; (iii) The expression “such other materials or
information as are available with the Assessing Officer” contained in S. 158BB
would include the materials gathered during the survey operation u/s.133A;
(iv) the material or information found in the course of survey proceeding
could not be a basis for making any addition in the block assessment; and (v)
the word ‘may’ used in S. 133A(3)(iii) of the Act, viz., “record the
statement of any person which may be useful for, or relevant to, any
proceeding under the Act” makes it clear that the materials collected and the
statement recorded during the survey u/s.133A are not conclusive piece of
evidence by itself.

(ii) In view of the scope and ambit of the materials
collected during the course of survey action u/s.133A shall not have any
evidentiary value, it could not be said solely on the basis of the statement
given by one of the partners of the assessee firm that the disclosed income
was assessable as lawful income of the assessee.”


 

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S. 281 : In order to declare a transfer as fraudulent, appropriate proceedings should be taken as required to be taken u/s.53 of Transfer of Property Act, 1882

New Page 2

45 Void transfer u/s.281 of Income-tax Act,
1961 : In order to declare a transfer as fraudulent u/s.281, appropriate
proceedings should be taken as required to be taken u/s.53 of Transfer of
Property Act, 1882. Order of TRO declaring transfer void was without
jurisdiction.


[Ms. Ruchi Mehta v. UOI, 170 Taxman 289 (Bom.)]

The petitioner purchased rights, title and interest of one
‘S’ who was defaulter under the Act, in a shop and accordingly a sale deed was
executed between the builder and the petitioner. Later, the TRO attached the
said shop for recovery of tax dues of ‘S’. On appeal, the Commissioner set aside
the action of attachment of the subject property. Thereafter, the TRO in
exercise of his powers u/s.281, passed an order declaring the sale of shop as
null and void.

 

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

“(i) S. 281 had come up for consideration before the
Supreme Court in case of TRO v. Gangadhar Vishwanath Ranade, (1998) 234
ITR 188. The Supreme Court observed that S. 281 merely declared what the law
was. The Supreme Court further held that S. 281 does not prescribe any
adjudicatory machinery for deciding any question which may arise u/s.281. The
Court further observed that in order to declare a transfer as fraudulent under
this Section, appropriate proceedings would have to be taken in accordance
with law in the same manner as they are required to be taken u/s.53 of the
Transfer of Property Act, 1882.

(ii) Considering the law declared by the Supreme Court in
the case of Gangadhar Vishwanath Ranade, it would be clear that the action of
the TRO in declaring the transfer of the property in favour of the petitioner
as void was clearly without jurisdiction.

(iii) The impugned order also attached civil consequences.
The TRO, before passing any such order, ought to have given an opportunity to
the petitioner if, in law, the TRO could exercise jurisdiction u/s.281. That
opportunity was also not given. The order, therefore, must also be set aside for
violation of the principles of natural justice and fair play.”

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S. 132B : Cash found during search satisfactorily explained : Application for release made within 30 days : Cash should be released.

New Page 2

43 Search and seizure : Release of cash : S.
132B of Income-tax Act, 1961 : Cash found in the course of search satisfactorily
explained : Application for release made within 30 days : Cash should be
released.


[Bipin Vimalchand Jain v. ADIT, 169 Taxman 396 (Bom.)]

In the course of the search action, cash amounting to
Rs.1,28,34,090 was found at the business premises of the petitioner. The
petitioner explained that out of the said amount, a sum of Rs.1.14 crores
belonged to one VJ and the explanation was verified and found to be correct by
the authorities. The petitioner filed application u/s.132B(1)(i) seeking release
of the said cash on the ground that it belonged to VJ. The Assessing Officer
rejected the application on the ground that assessment u/s.153A was pending and
seized cash was required to be applied for satisfying liabilities on completion
of that assessment.

 

The Bombay High Court allowed the writ petition filed by the
petitioner, directed release of cash and held as under :

“(i) Under the first proviso to S. 132B(1)(i), on an
application made for release of the seized asset within 30 days from the end
of the month in which the asset was seized, the Assessing Officer on being
satisfied regarding the nature and source of acquisition of such asset is
empowered to recover the existing liability out of such asset and release the
remaining portion of the asset.

(ii) In the instant case, it was not in dispute that the
application seeking release of the seized cash to the extent of Rs.1.14 crores
was made within 30 days of the seizure. Once the explanation given by the
petitioner regarding the nature and source of acquisition of the seized cash
was, on verification, found to be correct, then the amount of Rs.1.14 crores,
which belonged to VJ, could not be retained by the Assessing Officer by
rejecting the application filed by the petitioner.

(iii) The only reason given in the impugned order for
rejecting the application was that the assessment made u/s.153A was yet to be
finalised. In the absence of any material on record to suggest that the seized
cash represented the undisclosed income of the petitioner, respondent No. 2
could not have rejected the application made u/s.132B(1)(i) merely on the
ground that assessment u/s.153A was pending. In other words, application
u/s.132B(1)(i) could be rejected only if the Assessing Officer had reason to
believe that the seized cash represented the undisclosed income of the
petitioner liable to be assessed in the year in which search took place. In
the impugned order, it was not even remotely suggested that the seized cash
represented the undisclosed income of the petitioner.

(iv) In the circumstances, the impugned order was to be
quashed and set aside, with the direction to the Assessing Officer to release
the seized cash to the petitioner along with interest.”


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S. 263 : After certificate having been issued under KVSS, Commissioner not justified in exercising his revisionary power.

New Page 2

42 Revision : S. 263 of Income-tax Act,
1961 : A.Y. 1995-96 : KVSS 1998 : After certificate having been issued under
KVSS, Commissioner not justified in exercising power u/s.263.


[Siddhartha Tubes Ltd. v. CIT, 170 Taxman 233 (Del.)]

For the A.Y. 1995-96, the assessment of the assessee company
was completed u/s.143(3) of the Income-tax Act, 1961. During the pendency of
appeal the assessee filed declaration under KVSS 1998. The declaration was
accepted and a certificate, as contemplated u/s.90(2) of the Scheme was duly
issued and the matter was finally settled. Thereafter, the Commissioner set
aside the assessment order u/s. 263 with a direction to recalculate the
deduction u/s.80HH, u/s.80-I and u/s.80HHC. The Tribunal upheld the order passed
by the Commissioner.

 

The Delhi High Court allowed the appeal filed by the assessee
and held as under :

“(i) The Commissioner, in his order, had duly observed that
the Assessing Officer was not satisfied with the explanation of the assessee
and had, thus, recalculated deduction u/s.80HH and u/s.80-I after excluding
the profit from export of trading goods. It was, therefore, not on any
concealment of information that it was proposed to procede u/s.263, nor any
steps were suggested for cancellation of the declaration as per the provisions
of the KVSS.

(ii) Under those circumstances, as after the certificate
having been issued under the KVSS, it was not permissible to revise the said
assessment order u/s.263 and the Tribunal, therefore, had erred in holding to
the contrary.”


 

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S. 69D : Where documents represented bilateral transaction and were not on hundi paper, the provisions not applicable

New Page 2

41 Deemed income : S. 69D of Income-tax Act,
1961 : A.Y. 1998-99 : Amount borrowed or repaid on hundi : Document represented
bilateral transaction and not on hundi paper : S. 69D not applicable.


[CIT v. Ram Niwas, 170 Taxman 5 (Del.)]

Amongst the documents found in the course of search, one
document was drawn on a letter-head of the assessee and was treated as hundi. On
the basis of the said hundi and the presumption available u/s.69D of the
Income-tax Act, 1961, the Assessing Officer assessed the amount of such hundi in
the assessee’s hands. The Commissioner deleted the addition and the Tribunal
upheld the deletion.

 

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

“(i) The primary requirement for invoking the deeming
provision of S. 69D is that the document must be a hundi and it is only
thereafter that the deeming provision comes into play. The lower authorities
had found that the document was not a hundi. Clearly, the document in question
was not a hundi, because it represented a bilateral transaction and it was
also not on a hundi paper. In the absence of those vital ingredients, the
document could not be described as a hundi and, therefore, the presumption
u/s.69D would not be available to the Revenue.

(ii) The contention of the Revenue that the document was
found from the premises of ‘K’ and, therefore, it must be deemed to be a hundi,
could not be accepted. From where a document is found cannot, by any stretch
of imagination, explain the nature of the document.”
 


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S. 41(1) : Amount in question continued to be shown as liability in balance sheet. S. 41(1) not applicable

New Page 2

40 Deemed income : S. 41(1) of Income-tax
Act, 1961 : A.Y. 1989-90 : Assessee continued to show amount in question as
liability in balance sheet : CIT set aside the assessment u/s.263 on the ground
that proper enquiry of assessability u/s.41(1) not made : Not justified.

[CIT v. Tamil Nadu Warehousing Corporation, 170 Taxman
123 (Mad.)]

After the completion of the assessment u/s.143(3) of the
Income-tax Act, 1961 the Commissioner set aside the assessment order exercising
powers u/s. 263 on the ground that the assessee had surrendered the Group
Gratuity Scheme to the LIC and received certain amount; and that while
completing the assessment, the Assessing Officer had not made any proper enquiry
with respect to assessability of the said sum and directed the AO to assess the
said amount u/s.41(1). The Tribunal cancelled the order of the Commissioner
passed u/s.263.

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

“(i) From the reasoning given by the Tribunal, it was clear
that the assessee had continued to show the admitted amount as a liability in
the balance sheet. The undisputed fact was that it was a liability reflected
in the balance sheet. Once it was shown as a liability by the assessee, the
Commissioner was wrong in holding that the same was assessable u/s.41(1).
Unless and until there is a cessation of liability, S. 41 will not be pressed
into service.

(ii) Thus the reasoning given by the Tribunal was based on
valid materials and evidence and, hence, there was no error or legal infirmity
in the order of the Tribunal so as to warrant interference.”

 

 

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S. 80-IB : Conversion of polymer granules into specialised polymer alloys in powder form amounts to manufacture

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39 Deduction u/s.80-IB of Income-tax Act,
1961 : A.Y. 2002-03 : Conversion of polymer granules into specialised polymer
alloys in powder form amounts to manufacture : Assessee entitled to deduction
u/s.80-IB.


[CIT v. Shri Swasan Chemicals (M) P. Ltd., 300 ITR 115
(Mad.)]

The assessee-company was engaged in the manufacture of
plastic powder out of plastic granules. For the A.Y. 2002-03, the assessee’s
claim for deduction u/s.80-IB of the Income-tax Act, 1961 was rejected by the
Assessing Officer on the ground that the activity undertaken by the assessee in
producing the plastic powder did not amount to manufacture. The Tribunal allowed
the assessee’s claim.

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

“The Tribunal had recorded a finding that the assessee was
manufacturing various products of polymer powders. The finished products were
completely different from the raw materials. The product range itself was wide
and the products carried different technical nomenclature. The Tribunal had
come to the right conclusion which needed no interference.”


 

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S. 54B : Exemption from capital gains tax cannot be denied where land was purchased in the joint name of the son

New Page 2

37 Capital gains : Exemption u/s.54B of
Income-tax Act, 1961 : B. P. 1-4-1988 to 15-7-1998 : Sale of agricultural land
and out of sale proceeds, purchase of agricultural land in his name and in the
name of his only son : Exemption u/s.54B allowable.


[CIT v. Gurnam Singh, 170 Taxman 160 (P&H)]

In the relevant period, the assessee had sold agricultural
land and out of the sale proceeds, the assessee, along with his son, had
purchased another agricultural land and claimed deduction u/s.54B of the
Income-tax Act, 1961. The Assessing Officer disallowed the claim on the ground
that exemption from capital gains was available only in case the sale proceed
was invested by the assessee for purchasing another agricultural land and not in
respect of the land purchased by any other person. 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 :

“Undisputedly, the assessee had sold the agricultural land
which was being used by him for agricultural purposes. Out of its sale
proceeds, the assessee had purchased another piece of land in his name and in
the name of his only son, who was a bachelor and was dependent upon him, for
being used for agricultural purposes within the stipulated time. Undisputedly,
the purchased land was being used by the assessee only for agricultural
purposes and merely because in the sale deed his only son was also shown as
co-owner, it did not make any difference, because the purchased land was still
being used by the assessee for agricultural purposes. It was not the case of
the Revenue that the said land was being used exclusively by his son.”


 

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S. 80-IA : Twisting and texturising of Partially Oriented Yarn (POY) amounts to manufacturing or production

New Page 2

38 Deduction u/s.80-IA of Income-tax Act,
1961 : A.Y. 1996-97 : Twisting and texturis-ing of Partially Oriented Yarn (POY)
amounts to manufacturing or production: Assessee entitled to deduction
u/s.80-IA.


[CIT v. Emptee Poly-Yarn (P) Ltd., 170 Taxman 332 (Bom.)]

For the A.Y. 1996-97, the assessee-company’s claim for
deduction u/s.80-IA was disallowed on the ground that the activity of processing
of Partially Oriented Yarn (POY) was not an industrial activity. The Tribunal
allowed the claim.

 

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

“From the material considered it would be clear that POY
has different physical and chemical properties and when POY chips undergo the
process of texturising and/or twisting the yarn, i.e., twisted and/or
texturised or both, result in a product having different physical and chemical
properties. In other words, the process applied to POY, either for the purpose
of texturising or twisting, constitutes manufacture as the article produced is
recognised in the trade as distinct commodity pursuant to the process it
undergoes and which amounts to manufacture. Under the Central Excise Act, the
Union of India itself treats POY as distinct from POY drawn twisted or
texturised or both. The process amounts to manufacture as the original
commodity loses its identity. Therefore, the view taken by the Tribunal would
have to be upheld.


 

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Travel business : Expenditure on development of website is revenue expenditure allowable u/s.37(1).

New Page 1

57 Business expenditure : Revenue/Capital :
S. 37(1) of Income-tax Act, 1961 : A.Y. 2001-02 : Assessee in travel business :
Expenditure on development of its website : Is revenue expenditure allowable
u/s.37(1).


[CIT v. Indian Visit.com (P) Ltd., 176 Taxman 164 (Del.)]

The assessee was engaged in travel business. The assessee
made all kinds of arrangements for its clients such as booking of hotel rooms,
providing taxi services, booking of air tickets and railway tickets, etc. During
the relevant year the assessee had incurred an expenditure of Rs.20,23,317 on
development of its website. The assesse’s clients could use the said website for
the purpose of availing of the services provided by it. The assessee had claimed
the deduction of the said expenditure as business expenditure u/s.37(1) of the
Income-tax Act, 1961. The Assessing Officer disallowed the claim holding that
the expenditure was of capital nature inasmuch as the assessee had acquired an
asset, which would provide it with an enduring benefit. The Tribunal allowed the
assessee’s claim.

 

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

“(i) Considered in the light of the principles enunciated
by the Supreme Court, it is clear that just because a particular expenditure
may result in an enduring benefit it would not make such an expenditure
capital in nature. What is to be seen is what is the real intent and purpose
of the expenditure and as to whether there is any accretion to the fixed
capital of the assessee. In the case of expenditure on website, there is no
change in the fixed capital of the assessee. Although the website may provide
an enduring benefit to an assessee, the intent and purpose behind a website is
not to create an asset, but only to provide a means for disseminating the
information about the assessee. The same could very well have been achieved
and, indeed, in the past, it was achieved by printing travel brouchers and
other published material and pamphlets. The advance of technology and the
wide-spread use of the Internet has provided a very powerful medium to
companies to publicise their activities to a larger spectrum of people at a
much lower cost. Websites enable companies to do what the printed brouchers
did, but in a much more efficient manner as well as in a much shorter period
of time and covering a much larger set of people worldwide.

(ii) The Tribunal has correctly appreciated the facts as
well as the law on the subject and has come to the conclusion that the
expenditure on the website was of a revenue nature and not a capital nature.”


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Appellate : Powers in matters remitted by High Court restricted to directions by High Court.

New Page 1

56 Appellate Tribunal : Powers in matters
remitted by High Court : Powers restricted to directions by the High Court.


[Harsingar Gutkha (P) Ltd. v. ITAT, 176 Taxman 137
(All.)]

In an appeal filed by the assessee against the order of the
Tribunal the Allahabad High Court remanded the matter back to the Tribunal to
redecide the case on the basis of the material on record. Thereafter, by its
order dated 25-7-2008 the Tribunal directed the Assessing Officer to record the
statements of D and G to ascertain certain facts.

On a writ petition filed by the assessee challenging the said
order of the Tribunal, the Allahabad High Court held as under :

“(i) We are of the view that it was not open for the
Income-tax Appellate Tribunal to take fresh material on record by the impugned
order dated 25-7-2008. The Tribunal has directed the Assessing Authority to
record the statements of Shri Dinesh Singh, ACA and Shri G. L. Lath,
chartered accountant, which will amount to additional evidence/material in
the case. By the judgment and order passed by this Court, the Tribunal was
directed to adjudicate the matter afresh on the basis of the material on
record.

(ii) When a direction is issued to an Authority or Tribunal
to do a thing in certain manner, the thing must be done in that manner and no
other manner. Other methods of performance are necessarily forbidden.

(iii) In the instant case, the matter was remitted to the
Tribunal by this Court with certain directions and it was not open for the
Tribunal to take fresh evidence in the matter, as no such direction was issued
by this Court. The impugned order by which a fresh direction has been issued
by the Tribunal to the Assessing Officer is legally not sustainable.”


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Appeal to Tribunal : Powers of Single member : S. 255(3) : Income computed by AO less than Rs.5 lakhs : CIT(A) enhanced it to more than Rs.5 lakhs : Single member can decide appeal.

New Page 1

21 Appeal to Tribunal : Powers of Single
member : S. 255(3) of Income-tax Act, 1961 : A.Y. 1996-97 : Income computed by
AO less than Rs.5 lakhs : CIT(A) enhanced it to more than Rs.5 lakhs : Single
member can decide the appeal.


[CIT v. Mahakuteshwar Oil Industries, 298 ITR 390
(Kar.)]

The assessee was a manufacturer of edible oil. For the A.Y.
1996-97, it had declared the total income of Rs.8,660 in the return of income.
The Assessing Officer computed the total income at Rs.2,27,614. The Commissioner
enhanced the income to Rs.13,89,795. In appeal before the Tribunal, the Single
Member of the Tribunal decided the appeal and granted relief to the assessee.

 

In the appeal preferred by the Revenue, the following
questions were raised :

“(i) Whether the single member of the Tribunal had
jurisdiction to decide the appeal when the subject matter of appeal was
exceeding Rs.5,00,000 ?

(ii) Whether the Tribunal was justified in reversing the
findings of the Appellate Commissioner, when the assessee failed to discharge
the burden of proof as required u/s.68 of the Income-tax Act ?

 


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

“(i) A single member of the Tribunal can exercise powers if
the income computed by the Assessing Officer is less than Rs.5 lakhs, even
though the same has been enhanced by the Commissioner (Appeals) in excess of
Rs.5 lakhs.

(ii) The Tribunal had given a categorical finding that the
assessee was willing to examine the creditors as its witnesses to prove that
it had availed of loans from them. No records were produced to show that the
assessee had not made such a statement either before the Assessing Officer or
before the Commissioner (Appeals). When the Revenue had got the records to
show whether the assessee was willing to examine any of the witnesses or not,
when such documents were not placed before the Court, one would have to draw
an adverse inference against the Revenue.”

 


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Scientific Research and Development Expenditure : S. 35 : Whether machine being used for R&D purpose or for manufacturing, AO not authority to decide but prescribed authority u/s.35(3)

New Page 1

10 Scientific Research and Development Expenditure :
Deduction u/s.35 of Income-tax Act, 1961 : A.Y. 1999-00 : Axial machine and
computers : Whether machine being used for research and development purposes or
for manufacturing activity : Assessing Officer not an authority to decide :
Matter to be referred to prescribed authority u/s.35(3)


[CIT v. Deltron Ltd., 297 ITR 426 (Del.)]

The assessee incurred an expenditure of Rs.87,22,447 on
purchasing an axial machine along with machinery spares and computers. For the
A.Y. 1999-2000, it claimed the expenditure as a research and development
expenditure u/s.35(1) of the Income-tax Act, 1961. The Assessing Officer looked
at the brochure of the machine and came to the conclusion that the machine was
not used for research and development work and disallowed the claim. The
Commissioner (Appeals) held that the AO could not have disallowed the
expenditure without following the procedure prescribed u/s.35(3). Thereafter,
the Revenue could have made an attempt to find out the actual use of the
machine, but it did not do so. The Tribunal confirmed the view taken by the
Commissioner (Appeals).

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

“(i) The prescribed authority in this case was not the
Assessing Officer and he could not determine whether the machinery was used by
the assessee for research and development purposes or not.

(ii) Even assuming that the Assessing Officer had the
authority, the least that would have been expected from him was to confirm
physically whether or not the machine was being used for research and
development purposes. No conclusion could be arrived at by the Assessing
Officer by merely looking at the brochure. Therefore, there was no error in
the order passed by the Tribunal.

(iii) Moreover, since there was a gap of so many years, it
would not be appropriate to remand the matter to the Assessing Officer to
refer the matter to the prescribed authority to decide the question whether
the machinery was used for research and development purposes or not.”




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Penalty : S. 271B r/w. ss. 44AB and 80P of I. T. Act, 1961 : Failure to get accounts audited within prescribed time : No tax payable by assessee society in view of s. 80P : Penalty u/s. 271B not to be imposed

New Page 1

  1. Penalty : S. 271B r/w. ss. 44AB and 80P of I. T. Act,
    1961 : Failure to get accounts audited within prescribed time : No tax payable
    by assessee society in view of s. 80P : Penalty u/s. 271B not to be imposed.



 


[CIT vs. Iqbalpur Co-operative Cane Development Union
Ltd.; 179 Taxman 27 (Uttarakhand)].

The income of the assessee co-operative society was
exempted u/s. 80P of the Income-tax Act, 1961. The assessee society failed to
get its accounts audited u/s. 44AB of the Act within the prescribed time.
Therefore, the Assessing Officer imposed penalty u/s. 271B of the Act. The
Tribunal cancelled the penalty.

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

“i) There appeared no intention on the part of the
assessee to conceal the income or to deprive the Government of revenue as
there was no tax payable on the income of the assessee, in view of the
provisions of section 80P. Thus, it was not necessary for the Assessing
Officer to impose penalty u/s. 271B.

ii) On going through the impugned order passed by the
Tribunal, no sufficient reason was found to interfere with the satisfaction
recorded by the Tribunal as to the finding of fact that the assessee had no
intention to cause any loss to the revenue and as such, the penalty was not
necessarily required to be imposed by the Assessing Officer.

iii) Agreeing with the view of the Tribunal, it was to be
held that though an assessee is liable to penalty u/s. 271B for failure to
comply with the provisions of section 44AB but since in the instant case, no
tax was payable by the assessee in view of the provisions contained in
section 80P, the Tribunal had commited no error of law in setting aside the
penalty imposed by the Assessing Officer”.

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Refund : Interest u/s.244A of Income-tax Act, 1961 : A.Y. 2001-02 : TDS certificates submitted during assessment proceedings : Delay on refund not attributable to assessee : S. 244A(2) not attracted : Assessee entitled to interest u/s.244A.

New Page 1

Reported :


27. Refund : Interest
u/s.244A of Income-tax Act, 1961 : A.Y. 2001-02 : TDS certificates submitted
during assessment proceedings : Delay on refund not attributable to assessee :
S. 244A(2) not attracted : Assessee entitled to interest u/s.244A.

[CIT v. Larsen & Toubro
Ltd., 235 CTR 108 (Bom.)]

For the A.Y. 2001-02, the
assessment was completed by an order dated 31-3-2003 passed u/s. 143(3) of the
Income-tax Act, 1961. TDS certificates were filed in the course of the
assessment proceedings. Interest u/s.244A was denied on the ground that the TDS
certificates were not furnished with the return of income. The Tribunal found
that tax was deducted and deposited in the exchequer in time and that the
proceedings resulting in refund, has not been delayed for reasons attributable
to assessee. The Tribunal accordingly directed the Assessing Officer to pay
interest u/s. 244A for the period from
1-4-2001 to the date of refund.

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

“(i) S. 244A(2) provides
that in the event the proceedings resulting in refund has been delayed for
reasons attributable to the assessee, the period of delay so attributable
shall be exclude from the period for which the interest is payable. In the
present case, S. 244A(2) is clearly not attracted. The proceedings resulting
in the refund was not delayed for reasons attributable to the assessee.

(ii) Though the TDS
certificates were not submitted with the return and were filed during the
course of the assessment proceedings, the Tribunal has noted that tax was in
fact deducted at source at the right time. In the circumstances, the Tribunal
was correct in holding that since the benefit of TDS has been allowed to the
assessee, interest u/s. 244A could not be denied only on the ground that the
TDS certificates were not furnished with the return of income. Tax was
deducted and deposited in the exchequer in time.

(iii) S. 244A(2) is not
attracted. The appeal, therefore, does not raise any substantial question of
law and is dismissed.”

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Transfer pricing: A. Y. 2006-07: The Assessing officer cannot substitute the method of ‘cost plus mark up’ with the method of ‘cost plus mark up on FOB’ value of exports without establishing that assessee bear significant risks or AEs would enjoy geographical benefits

46. Transfer pricing: A. Y. 2006-07: The Assessing officer cannot substitute the method of ‘cost plus mark up’ with the method of ‘cost plus mark up on FOB’ value of exports without establishing that assessee bear significant risks or AEs would enjoy geographical benefits:

Li and Fung India (P.) Ltd. vs. CIT; [2013] 40 taxmann.com 300 (Delhi):

The assessee, ‘LFIL’, entered into an agreement with its associate enterprise (‘AE’) for rendering sourcing support services for the supply of high volume, time sensitive consumer goods, for which it was remunerated at cost plus mark-up of 5 %.; During the course of Transfer Pricing assessment, the assessee contended that such a transaction was at Arm’s Length Price (‘ALP’) on an application of the TNM method. The Transfer Pricing Officer (‘TPO’) observed that assessee was performing all critical functions, had assumed significant risks and it had used both tangible and unique intangibles developed by it over a period of time, which had given an advantage to the AE in form of low cost of product, quality and had enhanced the profitability of AE. Thus, it held that the compensation of cost plus mark up of 5 % was not at ALP and applied a mark-up of 5 % on the FOB value of exports made by the Indian manufacturer to overseas third party customers. Therefore, the Assessing Officer made addition on the basis of order passed by TPO, which was further affirmed by the Tribunal

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

“i) The impugned order had not shown how and to what extent assessee bore significant risks, or that the AE enjoyed such location advantages, so as to justify rejection of the Transfer pricing exercise undertaken by assessee.

ii)    Tax authorities should base their conclusions on specific facts, and not on vague generalities, such as ‘significant risk’, ‘functional risk’, ‘enterprise risk’, etc., without any material on record to establish such findings. If such findings are warranted, they should be supported by demonstrable reasons, based on facts and the relative evaluation of their weight and significance.

iii)    Where all elements of a proper TNMM are detailed and disclosed in the assessee’s reports, care should be taken by the tax administrators and authorities to analyse them in details and then proceed to record reasons why some or all of them are unacceptable;?

iv)    The impugned order, upholding the determination of certain margin over the FOB value of the AE’s contract, was an error in law. Therefore, the TPO’s addition of the cost plus 5 % markup on the FOB value of exports was without foundation and was to be deleted.”

Educational Institution: Exemption u/s. 10(23C)(iiiad): A. Ys. 2000-01 to 2005-06: The assessee society running 25 educational institutions claimed exemption u/s. 10(23C)(iiiad) in respect of institutions satisfying the conditions: Denial of exemption on the ground that the aggregate receipts of all institutions exceeded limit of Rs. 1 crore: Denial of exemption not proper: Assessee entitled to exemption:

35. Educational Institution: Exemption u/s. 10(23C)(iiiad): A. Ys. 2000-01 to 2005-06: The assessee society running 25 educational institutions claimed exemption u/s. 10(23C)(iiiad) in respect of institutions satisfying the conditions: Denial of exemption on the ground that the aggregate receipts of all institutions exceeded limit of Rs. 1 crore: Denial of exemption not proper: Assessee entitled to exemption:

CIT vs. Childrens Education Society; 358 ITR 373 (Karn):

The assessee society was running around 25 educational institutions. In the relevant assessment years the assessee claimed exemption u/s. 10(23C)(iiiad) of the Income-tax Act, 1961 in respect of the educational institutions which satisfied the relevant conditions. The Assessing Officer denied exemption on the ground that the aggregate of the receipts of all the institutions run by the assessee was more than Rs. 1 crore which is the condition prescribed u/s. 10(23C)(iiiad) of the Act. The Tribunal allowed the assessee’s claim and held that the assessee was entitled to exemption us. 10(23C)(iiiad) for each of the institutions the annual receipts of which were less than Rs. 1 crore.  

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

“The Tribunal was correct in holding that the exemption in terms of the provisions of section 10(23C)(iiiad) was available to the assessee as annual receipt of each of the institutions of the assessee was less than the prescribed limit under the provision.”

Turnover and value of stock adopted by Sales Tax Authorities is binding on Income-tax Authorities: Addition merely on basis of statement of third parties is not proper:

20. Assessment:  A.  Y.  1998-99  to  2002-03:

Turnover and value of stock adopted by Sales Tax Authorities is binding on Income-tax Authorities: Addition merely on basis of statement of third parties is not proper:

CIT vs. Smt. Sakuntala Devi Khetan: 352 ITR 484 (Mad):

The assessee was a trader in turmeric. For the relevant assessment years the Assessing Officer made additions on the basis statement of third parties. The Tribunal directed the Assessing Officer to adopt the figures of turnover finally assessed by the Sales Tax Authorities and apply the GP rate accordingly.

On appeal by the Revenue, the following question was raised before the Madras High Court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the turnover and profit of the assessee for the assessment year under consideration could not be computed in the reassessment on the basis of information received in the course of search conducted in certain cases on the sole ground that the Sales Tax Authorities have accepted the assessee’s purchases, sales and closing stock?”

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

“i)    Unless and until the competent authority under the Sales Tax Act differs or varies with the closing stock of the assessee, the return accepted by the Commercial Tax Department is binding on the Income -tax Authorities and the Assessing Officer has no power to scrutinise the return submitted by the assessee to the Commercial Tax Department and accepted by the Authorities. The Assessing Officer has no jurisdiction to go beyond the value of the closing stock declared by the assessee and accepted by the Commercial Tax Department.

ii)    The assessee had placed the sales tax returns before the Assessing Officer in respect of the A. Ys. 1998-99 to 2001-02. Therefore, sufficient materials were placed before the Assessing Officer in respect of those assessment years and accepted by the Authorities.

iii)    The Tribunal rightly found that the Department could not have made the addition merely on the basis of the statement of third parties and, consequently, set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to adopt the figures of turnover finally assessed by the sales tax authorities and apply the gross profit rate accordingly.”